Question

Handwrite in text plz not in pic since its hard to read from and plz dont copy answers that were answered before

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1. The text identifies three key ideas that are foundations to the study of economics. Identify and explain each.

2. Explain the differences between positive and normative analysis. Give an example of each that would be relevant in economics.

3. Explain the difference between productive and allocative efficiency. How do you think a centrally planned economy versus a market economy would perform under each measure of efficiency?

Answer 1

Answer 1:

Economics refers to the study of choices made by consumers, businesses and government to attain their goals given their scare resources. The problem of choice arises because wants of the individuals are unlimited but the resources to satisfy these wants are limited in the economy. The three key economic ideas that are foundations to the study of economics are as follows:

1. People are Rational: Economists assume that people are rational as consumers and firms take all available information into account to take actions to achieve their goals. The consumers take into consideration the benefits and costs of each decision and take the actions where the benefits of the actions outweigh the costs. Thus, consumers and firms are rational.

2. People respond to incentives: It has been observed that people whether they are consumers, producers, workers, savers or investors respond to the incentives to allocate their scare resources in a way that highest possible return are provided to them in this case. For instance, if price of the good increase, then consumers will reduce the consumption of that good and producers will increase the sale of the good in order to earn higher return.

3. Optimal Decisions are made at the margin : Margin in this case means extra. The consumers and producers in order to make any decision regrading consumption or production of the good compare the marginal benefit and marginal cost of the good and the optimal decision is to continue any activity up to the point where the marginal benefit from the decision is equal to the marginal cost of the decision.

Thus, the three key ideas of economics are the foundation of economic study on which various models of economics are based.