Question

Write a one page summary that addresses the following:

1. 1. What is Economics?
   2. Provide an example of scarcity problem that affects an individual consumer.
   3. Which economics principles govern the situation you described?

Answer 1

Economics is a subject that deals with choices and scarcity. Life in general involves a lot of choices which may or not involve money, these may still be economic problems. Some of the examples are: Taking up a job vs attending college, Volunteering for charity or contributing through money. It is the study of best use of resources having alternative uses and unlimited wants of people. Economics applies to all aspects of life and understanding of the subject will help us in understanding the news, make financial decisions, shape public policy, and see the world in a new way. The application of economics as a subject is wide ranging from wealth and finance to health, public policy, politics, gender, employment, religion etc. etc. Hence, economic problems exist everywhere.

As we all know resources are scarce in nature, an individual always have budget constraint and they cannot have all that they always want, and that's where economics comes into picture. Land, Labour, capital & Entrepreneurship are limited in supply. Economics focuses on optimal allocation of scarce resources for the benefit of everyone at some cost known as opportunity cost.

Whilst the public hand is mostly involved in allocating scarce resources, it can’t and will never fully meet the needs of any one particular producer or consumer. It tries its very best to allocate resources as best as it can. However, the need is never fully satisfied as there is scarcity in resources.

The principles of economics that  govern this example is (Taking up a job vs attending college, Volunteering for charity or contributing through money) that people face trade-offs, To get one thing, we usually have to give up something else. Along with the economic principle of Opportunity Cost that says, The Cost of Something is What You Give Up to Get It, The opportunity cost of going to college is the money you could have earned if you used that time to work.

The other principles of economics are:

1. Rational People Think at the Margin
   • Marginal changes are small, incremental changes to an existing plan of action
     • Ex. Deciding to produce one more pencil or not
   • People will only take action of the marginal benefit exceed the marginal cost
2. People Respond to Incentives
   • Incentive is something that causes a person to act. Because people use cost and benefit analysis, they also respond to incentives
     • Ex. Higher taxes on cigarettes to prevent smoking
3. Trade Can Make Everyone Better Off
   • Trade allows countries to specialize according to their comparative advantages and to enjoy a greater variety of goods and services
4. Markets Are Usually a Good Way to Organize Economic Activity
   • Adam Smith made the observation that when households and firms interact in markets guided by the invisible hand, they will produce the most surpluses for the economy
5. Governments Can Sometimes Improve Economic Outcomes
   • Market failures occur when the market fails to allocate resources efficiently. Governments can step in and intervene in order to promote efficiency and equity.
6. The Standard of Living Depends on a Country's Production
   • The more goods and services produced in a country, the higher the standard of living. As people consume a larger quantity of goods and services, their standard of living will increase
7. Prices Rise When the Government Prints Too Much Money
   • When too much money is floating in the economy, there will be higher demand for goods and services. This will cause firms to increase their price in the long run causing inflation.
8. Society Faces a Short-Run Tradeoff Between Inflation and Unemployment
   • In the short run, when prices increase, suppliers will want to increase their production of goods and services. In order to achieve this, they need to hire more workers to produce those goods and services. More hiring means lower unemployment while there is still inflation. However, this is not the case in the long-run.