Answer to Question #101452 in Economics for harmanjot

Question

The purpose of economics is to provide a way to think. Economic thinking and decision-making recognize that because of scarcity something cannot be obtained without giving up something else. Consequently, we must make our decisions by comparing the costs and benefits and evaluating the tradeoffs. In doing so, five principles of economic thought come into play: tradeoffs, incentives, opportunity costs, marginal thinking, and voluntary exchange. Explain with a specific example of each how you apply these five principles of economic thought in your everyday life.

Answer 1

There are five principles of economic thought. Tradeoff is a balancing of factors all of which are not attainable at the same time. For example, if you work less to have more leisure, then you earn less money. Incentive is a contingent motivator. For example, if you need money to buy a car, then you have incentive to work. Opportunity cost is the cost of the next best alternative of a product or service. For example, the opportunity cost of producing one more car is producing of five computers. Marginal thinking is thinking about how much extra resources are worth. For example, we can calculate the additional output produced by one more employee and compare it with increase in salary paid to him. Voluntary exchange is the act of buyers and sellers freely and willingly engaging in market transactions. For example, if somebody wants to sell a car, then he or she can find a person, who wants to buy this car, or a buyer, if this transaction is affordable for both.