Concept Introduction:
A set of principles for understanding the economics that makes the individuals to take decisions People face trade- offs: People face trade-offs because of the
Opportunity Cost: The opportunity cost is the next best activity forgone, in order to earn something we have to lose something that is the principle behind opportunity cost.
Marginal Analysis: Marginal analysis is used to compare the benefits and cost derives out of a specific action. The marginal changes refers to the small incremental adjustment to a plan of action.
People respond to incentives: It is a common phenomenon when there is more incentive available people are ready to work more time. An individual is prone to an incentive; an incentive is one which promotes an individual to do a specific task.
Explanation of Solution
There are four principles that guide the choices made by individuals and they are people face trade-offs, the cost of something is what you give up to get it, rational people think at the margin and people respond to incentives. We all know that all people face trade-offs, for an example I must decide how to allocate my time within a day either to study economics or go for a movie. So if go to a movie I am giving up the time allocated for studying economics. On the other hand if I study economics I am giving up time watching a movie so people always face trade-off. The second one is the opportunity cost, it is defined as the next best activity forgone considering the previous example we have an opportunity cost for selecting the activities, if I go for the movie I would likely to get a lower grade in exam and if I study economics I would have lost the satisfaction from the movie. The third one is rational people will use the marginal analysis before they are getting in to the activity if the cost of the activity is greater than the benefit they will not do it. The fourth principle is people respond to incentives. The incentive is one which promotes the individual to do a specific task. Where there is more incentive people will go over there.
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