Principles of Economics:
People face trade offs:
In order to get one thing we have to give up another we like. You should make a choice.
Cost benefit analysis is used to resolve trade offs.
Ex: I went to mall for shopping and i liked two dresses there but I have limited amount of money, so i have to give up one dress so that i can buy another.
I have an exam tomorrow and also a much awaited film is going to be released on the same day .Here i give up going to movie to attend the exam. Hence you are trading off movie for exam.
The cost of something is what you give up to get it:
There is nothing free in this world.If you want something you have to give up something .
In order to take decisions you should compare the cost and benefits of alternatives. It is opportunity
cost.
Ex: I want to buy a new mobile so i give up some costs and save money.Here i am giving up extra costs so that i can buy a new mobile.
When i was preparing for my cat exam i gave up all my hobbies, so that i can prepare well for the exam. Here i sacrificed my interests to prepare for exam.
Rational people think at margin:
A rational decision maker takes a decision based on benefits he can get.Doing things whats best for you in a proper manner. You should think what's next or additional action means to you.
Ex: When you take LIC policy you think about the future benefits you get by taking that policy.Here you are taking the decision based on the benefits you get in future.
You bought a watch just because you got it for low price, but you should consider the quality of the watch and durability.
People respond to incentives:
Incentives are something that makes a person to act.It can be reward or punishment.People respond to incentives as they make decisions based on costs and benefits.
Ex: When the price of the petrol increases people opt for CNG .Here the incentive is increase of price .
When you came to know that reliance is offering 50% off on T-shirts you are willing to buy those because you got it for low price.Here the incentive is offering discount.
Law of Demand:
The demand for commodity varies inversely with its own price.The demand for goods increases when the price of the product decreases and the other things remains unchanged.
Ex: We went to market to buy 1 dozen apples but the price is too high (Rs.300/- per dozen).
So instead of buying 1 dozen I bought only 1/2 dozen because the price is too high.
We went to restaurant to eat biryani but the cost of dishes in this restaurant is too high.So from next time you wont go there because the cost is high.Here the demand decreases because of the cost of dishes.
Law of Supply:
Law of Supply states that the quantity of the product directly varies with its own price.
The quantity supplied increases along with the increase of the price and other factors remain unchanged.
Ex: When we come to know that MBA jobs pay more than Engineering jobs
the demand for MBA will increase.
When we are willing to pay more for pastries than normal cakes the demand for pastries increases.
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