Principles of Economics

This article is about the main principles of economics and the choices we make.

Principles of Economics

Economics involves a lot more than money, such as the choices that we all make. An economic agent is a person or group that makes choices. Individuals make choices every day. Groups can also make choices.

The choices that people make are about the allocation of scarce resources. Scarcity exists because people have unlimited desires and the world can not accommodate these desires. So, economics is the study of how everyone allocates their scarce resources.

We study economics to see what people do and what we should do. The study of what people do is called positive economics. The study of what they should do is normative economics.

Economics can be further divided into macroeconomics and microeconomics. Macroeconomics is the study of the economy as a whole. The includes subjects like growth rate and inflation rate. Microeconomics is the study of how individuals or small entities make choices. We need to understand this when we want to understand a small piece of the economy.

The main principles of economics include optimization, equilibrium, and empiricism.

Optimization is about picking the best available option. Optimizing choices involves trade-offs. to gain one thing, you have to give up another. A budget constraint is therefore the set of things that a person can choose to do without breaking their goals. These choices also involve opportunity costs. This is something that you must give up when you make a choice. To do this, we perform a cost-benefit analysis. This is when we want to compare a set of feasible alternatives and pick the best one. We do this so that we can pick the alternative that has the largest net benefit.

Equilibrium is when everyone believes that making a change in their behavior is pointless. Everyone is trying to optimize.

Empiricism is about making choices based on data. We use data to test if theories are correct. People do this to see what is causing things in the world to happen.