Economic Ideas

As you trying to achieve your goals, whether they are buying a new car or finding a job, you will interact with other people in markets. A market is a group of buying and sellers of a good or service and the institution or arrangement by which they come together to trade. Most of economics involves analyzing what happens in markets.

Economists generally assume that people are rational. This assumption does not mean that economists believe everyone knows everything or always makes the “best” decision. It means that economists assume that consumers and firms use all available information as they act to achieve their goals. Rational individuals weight the benefits and costs of each action, and they choose an action only if the benefits outweight the costs. For example, if Proton charges a price of RM50,000 for a new model of Proton cars, economists assume that the managers at Proton have estimated that a price of RM50,000 will earn Proton the most profit. The managers may be wrong; perhaps a price of RM60,000 would be more profitable, but economists assume that the managers at Proton have acted rationally on the basis of the information available to them in choosing the price. Of course, not everyone behaves rationally all the time. Still, the assumption of rational behavior is very useful in explaining most of the choices that people make.

Second, economists generally assume that people respond to economic incentives. As we know, human beings act from a variety of motives, including fulfilling their ambitions, religion beliefs and family tradition. Economists emphasize that consumers and firms consistently respond to economic incentives. For example, when government make a policy to encourage people to get involved in production of foods products, incentives such as easy to get credits and assistance from government agencies will encourage more people to get involved in this sectors.

Third, economist generally assumes that people will always made optimal decisions at the margin. Economists use the word marginal to mean an extra or additional benefit or cost of a decision. Should OrganicGro produce an additional 300 tones of fertilizer? Firms receive revenue from selling goods. OrganicGro’s marginal cost is the additional cost- for wages, other inputs, and so forth – of producing 300 tones more fertilizer. Economists reason that the optimal decision is to continue any activity up to the point where the marginal benefit equals the marginal cost-in symbols, where MB = MC. In basic economic theory, normally we use Marginal Revenue (MR) to represent Marginal Benefit (MB). Often we apply this rule without thinking about it. In business, firms often have to make careful calculations to determine, for example, whether the additional revenue received from increasing production is greater or less than the additional cost of the production.