If you are unsure of which of the following terms implies the least degree of confidence in an economic generalization, you have the choice of deciding which term is most likely to be appropriate. The following are the four terms that you may choose from.
C) rational decisions in a context of marginal costs and marginal benefits
When businesses and households make rational decisions, they take into account the marginal cost and marginal benefit. In this way, they make choices based on the availability of resources and their wants. However, not all economic decisions are made in a rational way. Many are simply irrational.
Economic decisions can be divided into two categories, macroeconomic and microeconomic. Macroeconomic decisions are made at the level of the economy, while microeconomic decisions are made within an individual’s economic environment. These choices involve the use of scarce resources and the sacrifice of other goods. Whether it is the production of a product or a service, it is the tradeoff between what is offered and what is demanded.
Marginal costs and benefits are used in economics to explain why some economic decisions are made and others are not. This theory is based on the fact that a tradeoff always exists between economic goals. For example, a physician practice may expand or reduce its services to increase or decrease fixed payment rates. The firm’s marginal revenue falls, because it loses revenue on all units sold when the price is reduced. Therefore, the firm is maximizing profits at a specific region.
Nevertheless, many economic behaviors are irrational, as evidenced by the fact that customers sometimes choose a shorter line than they need, even if there is no line at all. Customers do not realize that the marginal costs of the choice are much greater than the marginal benefits of the choice. Furthermore, most economic decisions are made at the margin. Thus, it is not advisable to attempt to analyze all economic decisions through the use of the rational decision making method.
D) unlimited resources in a context of limited economic wants
The science of economics is a broad field of study that aims to explain how an economy works. In other words, it tries to answer questions like, “What is the economy?” and “How can we make money?” While the field is mainly academic, it is also important for businesses. A business can only prosper if it knows how to optimize its resources. It is based on the idea that there are tradeoffs between different goals. If an organization does not properly plan for these tradeoffs, it will not only lose customers, but it will also incur a loss of efficiency.
Although the field is broad, it can be broken down into four main categories. One is positive economics, which looks at the benefits and costs of a policy option. Another is negative economics, which uses normative economics to calculate the optimal solution to a problem. Still another is a combination of both, which is called mixed economy.
In the end, all production involves the use of scarce resources, a fact that is not always taken into consideration. However, there is no doubt that economics is a useful tool for business. As a matter of fact, it has become so important that it is now used in everything from computer science to biology.
Exercise 13.1
The latest GDP numbers from the US Bureau of Economic Analysis show that real domestic output increased by 2.3 percent in the last twelve months. The general price level also increased by 3.1 percent. The unemployment rate was 6.5 percent of the labor force. The GDP per capita increased by 2.2 percent, but the unemployment rate was a full percentage point higher. Clearly, the economy is in a funk. A major concern is that wages are not keeping up with inflation. It’s only a matter of time before unemployment rises above 8.5 percent. Fortunately, the Federal Reserve has taken a more active role in taming the economy.
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