Foundational principles of economics

Economics : It is all about behaviour and choices.

Principles: 

1) People face trade-offs:

Consider a girl who want to buy a dress from shopping mall.She falls in a dilemma which dress to buy, what to buy and what not to buy. For every hour she spends time in mall for shopping means she gives up an hour she could have used for other works. So this is the trade-off facing principle.

This is resolved through cost benefit analysis ( cost benefit analysis is a process by which decisions are analysed and the strengths and weaknesses of alternatives are estimated)

2) The cost of something is what you give up to get it: 

Consider a student who completed under graduation, whether the student chooses for a post graduation or job. If the student want to do MBA, which college will he/she choose? After the CAT or MAT result the student has to select one college from the list of colleges. If he/she chooses some ‘X’ college there is some extra benefit gained from that college. That extra benefit is called marginal net benefit. ( Marginal net benefit is an additional satisfaction that a person receives.) The opportunity cost of an item is what you give up to get that item. 

3) Rational people think at the margin: 

Consider free up-graduation in Railways. If a passenger ticket is in waiting list (e.g sleeper coach) and if there are AC seats available that passenger get upgraded to AC seat without paying any extra fare. Marginal expenditure spent by railway department is zero, but additional money is generated. 

A rational decision maker takes an action if and only if the marginal benefit of the action exceeds the marginal cost. 

Rational people systematically and purposefully do the best they can to achieve their objectives.

4) People respond to incentives: 

Consider some of the jobs where people are attracted to the incentives offered. For a instance take Ola cabs where the Ola company offers incentives to the Ola drivers so that they work around the clock. 

An incentive is something that induces a person to act, such as the prospect of a punishment or a reward. Because rational people make decisions by comparing costs and benefits, they respond to incentives.