Economics: First Principles

Economics is the study of how individuals make decisions about what to do and what not to do

Resources are scarce. A resource is anything that can be used to produce something else. Scarce means that it cannot be used in all the ways a society intends to use it. This cam be in the form of limited income or limited supply or limited time. Others could be natural resources or human resources. Due to those limitations we must think about opportunity cost.

An opportunity cost is what you just give up to get something. With opportunity costs you make a decision between the margin of tradeoffs which are comparisons of cost and benefit. Doing a bit more or a bit less of something is called marginal decisions and there is a field of study around them called marginal analysis.

People usually exploit opportunities that make them better off. With that idea in mind there is consideration around incentives for people to change their behavior.

We must study the interaction of how individuals’ choices affect each other.

There are gains from trade. People can get more of what they want through trade that they can do through self sufficiency. Due to specialization one person can produce far more of one thing and trade for that than one person can create everything his or herself. The economy as a whole can produce more when each person specializes  and trades.

Markets move towards equilibrium. Euilibrium is when individuals can’t make themselves better off by doing something different. An economy is efficient when it take all opportunities to make some people better off without making other people worse off. In that there is equity where each person gets their fair share. Therefore resources should be used as efficiently as possible to achieve economic goals.

Markets generally lead to efficiency. Incentives are built into the market economy so that resources are put them.good use. In cases though where there is market failure then governments can intervene to improve social welfare.

There is a whole set of studies on market failure. Some reapsons are that individual actions have side effects that are not properly taken into account in the market, one party can prevent mutually beneficial trades from occurring, and some voods are unsuited for oneefficient market management.

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