Document WPS Office 2 1

Simplify the problem- refers to the process of breaking down complex economic issues or phenomena
into simpler, more manageable components.
Simplifying assumptions - are used to eliminate unnecessary complexities and focus on the key factors
that drive economic behavior.
Rational self-interest- refers to the assumption that individuals and firms act in a way that maximizes
their own well-being or utility. It is based on the idea that individuals make decisions and choices that
they believe will bring them the greatest personal benefit or satisfaction.
The "everybody uses theory" - refers to the idea that individuals, firms, and policymakers rely on
economic theories and models to make decisions and understand how the economy functions. It
suggests that economic theories are not limited to academics or economists but are widely used by
various actors in society.
Economists telling a story- refers to the practice of economists using narratives or explanations to
describe and analyze economic phenomena. Rather than solely relying on mathematical models and
equations, economists often employ storytelling techniques to communicate their ideas, theories, and
findings in a more accessible and relatable manner.
Normative versus positive statement
Positive Statements: Positive statements in economics are objective statements that describe how the
economy works or how economic phenomena are observed. They are based on facts, data, and
empirical evidence.
Normative Statements: Normative statements in economics are subjective statements that express
opinions, value judgments, or recommendations about how the economy should be or how economic
outcomes should be evaluated.
Marginal analysis- refers to the examination of the incremental or additional changes in costs, benefits,
or utility resulting from a small change in an economic decision or variable. It involves analyzing the
effects of small, incremental adjustments on the overall decision-making process.
Compare Marginal cost with marginal benefit
Marginal Cost: Marginal cost refers to the additional cost incurred by producing or consuming one more
unit of a good or service. It measures the change in total cost resulting from a small increase in output or
consumption.
Marginal Benefit: Marginal benefit refers to the additional utility or satisfaction gained from consuming
or producing one more unit of a good or service. It measures the change in total benefit resulting from a
small increase in output or consumption.
Choice requires time and information -it emphasizes the importance of considering the availability of
time and information when making decisions based on marginal analysis.
Market economics and National economics
Market economics, also known as free-market economics or capitalism, is an economic system in which
the production, distribution, and pricing of goods and services are determined by the interactions of
individuals and businesses in a competitive market .
National economics, on the other hand, refers to the broader study of the economy of a nation as a
whole. It encompasses various aspects such as production, consumption, investment, government
policies, and international trade. National economics focuses on understanding the overall performance
and behavior of the economy, including indicators such as GDP (Gross Domestic Product), inflation,
unemployment, and fiscal policies.
4 Market Participants
1. Households
Households are the primary consumers in the economy. They supply factors of production, such as
labor, land, and capital, to firms in exchange for income. Households use this income to purchase goods
and services, thereby driving consumption.
2. Firms
Firms are business entities that produce goods and services to meet the demands of households and
other firms. They employ resources, including labor, capital, and raw materials, to produce and sell
goods and services in the market.
3. Government
The government plays a multifaceted role in the economy. It provides public goods and services,
enforces regulations, maintains law and order, and redistributes income. It also influences the economy
through fiscal and monetary policies.
4. Rest of the Whole World
The rest of the whole world refers to foreign countries and their economies. It represents the external
sector and encompasses international trade, capital flows, and exchange of goods and services between
domestic and foreign entities.
Market- are the means by which buyers and sellers carry out exchange.
Key components of Market
1. Product Market
The product market refers to the marketplace where final goods and services are bought and sold by
households and firms. It is the market where consumers purchase goods and services for their personal
consumption or for use in production processes. Firms supply goods and services in response to
consumer demand, and households act as buyers in this market.
2. Resource Market
The resource market, also known as the factor market, is where the exchange of resources takes place.
Resources include land, labor, capital, and entrepreneurship, which are essential inputs in the
production process. Firms demand resources in order to produce goods and services, while households
supply resources in exchange for income.
3. Labor Market
The labor market is a specific type of resource market that deals specifically with the exchange of labor
services. It is where individuals supply their labor, skills, and expertise to firms in exchange for wages or
salaries. Firms, on the other hand, demand labor to carry out production processes and meet their
business needs.

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Document WPS Office 2 1

Uploaded by

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Simplify the problem- refers to the process of breaking down complex economic issues or phenomena

into simpler, more manageable components.

Normative versus positive statement

Compare Marginal cost with marginal benefit

4. Rest of the Whole World

Key components of Market

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