Say Candy Island wanted to increase chocolate production from 300 (point B) to 600 (point C). Depending on how they distribute their production hours, they can produce X amount of Twizzlers and Y amount of chocolate.Īn effective method to interpret this data is to look at increases in one good and how much you must give up of the other good. In the graph above we see the production output possibilities of Candy Island. 2 - Production possibilities curve example All living creatures naturally practice microeconomics without even realizing it!įig. Microeconomics also covers individual firms rather than all firms in the economy.īy narrowing the scope in which we analyze the world, we can better understand minute changes and variables that lead us to certain outcomes. That means that we will focus on individuals and their outcomes rather than a population of people. The principles of microeconomics focus on small-level decisions and interactions.
For instance, if a decline in prices is predicted, we may want to save some money for later. These predictions are very helpful for economic decision-making. This information can also provide estimates of what may happen. Economics studies what is happening as well as what is observed to usually happen. Prediction - an important component that forecasts what may happen. For example, naming and explaining relevant economic theories and their functions will provide the framework to understand the analysis. They now have to explain it to others (including other economists and those who are not economists), so action can be taken. After analysis, economists have the answers to the why and how of things. For example, why is there higher demand for one product over the other, or why do certain goods cost more than others?Įxplanation - here, we have the component that clarifies the outcomes of the analysis. It asks why and how things are the way they are. Specifically, economics describes the number of products, prices, demand, spending, and Gross Domestic Product (GDP) among other economic metrics.Īnalysis - this component of economics analyzes the things that have been described. You can look at it as the component that describes the wants, the resources, and the outcomes of our economic efforts. Let's cover these components briefly.ĭescription - is the component of economics that tells us the state of things. Economics has four main components: description, analysis, explanation, and prediction. This is the fundamental problem economics seeks to solve. Price Determination in a Competitive MarketĮconomic principles are a set of rules or concepts that govern how people satisfy their unlimited wants with their limited resources.įrom the definitions provided, we can learn that people do not have enough resources to match all their wants, and it gives rise to the need for a system to help us make the best use of what we have.Market Equilibrium Consumer and Producer Surplus.Determinants of Price Elasticity of Demand.Cross Price Elasticity of Demand Formula.Effects of Taxes and Subsidies on Market Structures.Monopolistic Competition in the Short Run.Monopolistic Competition in the Long Run.Behavioural Economics and Public Policy.
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