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By the end of this section, you will be able to:

  • Analyze arguments against economic approaches to decision-making
  • Interpret a tradeoff diagram
  • Contrast normative statements and positive statements

It is one thing to understand the economic approach to decision-making and another thing to feel comfortable applying it. The sources of discomfort typically fall into two categories: that people do not act in the way that fits the economic way of thinking, and that even if people did act that way, they should try not to. Let’s consider these arguments in turn.

First objection: people, firms, and society do not act like this

The economic approach to decision-making seems to require more information than most individuals possess and more careful decision-making than most individuals actually display. After all, do you or any of your friends draw a budget constraint and mutter to yourself about maximizing utility before you head to the shopping mall? Do members of the U.S. Congress contemplate production possibilities frontiers before they vote on the annual budget? The messy ways in which people and societies operate somehow doesn’t look much like neat budget constraints or smoothly curving production possibilities frontiers.

However, the economics approach can be a useful way to analyze and understand the tradeoffs of economic decisions even so. To appreciate this point, imagine for a moment that you are playing basketball, dribbling to the right, and throwing a bounce-pass to the left to a teammate who is running toward the basket. A physicist or engineer could work out the correct speed and trajectory for the pass, given the different movements involved and the weight and bounciness of the ball. But when you are playing basketball, you do not perform any of these calculations. You just pass the ball, and if you are a good player, you will do so with high accuracy.

Someone might argue: “The scientist’s formula of the bounce-pass requires a far greater knowledge of physics and far more specific information about speeds of movement and weights than the basketball player actually has, so it must be an unrealistic description of how basketball passes are actually made.” This reaction would be wrongheaded. The fact that a good player can throw the ball accurately because of practice and skill, without making a physics calculation, does not mean that the physics calculation is wrong.

Similarly, from an economic point of view, someone who goes shopping for groceries every week has a great deal of practice with how to purchase the combination of goods that will provide that person with utility, even if the shopper does not phrase decisions in terms of a budget constraint. Government institutions may work imperfectly and slowly, but in general, a democratic form of government feels pressure from voters and social institutions to make the choices that are most widely preferred by people in that society. So, when thinking about the economic actions of groups of people, firms, and society, it is reasonable, as a first approximation, to analyze them with the tools of economic analysis. For more on this, read about behavioral economics in the chapter on Consumer Choices .

Questions & Answers

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Christiana Reply
Inflation is a general increase in price levels
is the action of inflating something
inflation is the persistent increase in general price level of goods and services in an economy over a considerable period of time .
inflation is the general increase of a commodity in a particular period of time.
inflation is a general increase in price levels of commodities
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inflation is the period of persistent rise in the general level of the price of goods services over time
we have creeping inflation, demand pull inflation ,cost push inflation, and galloping inflation .
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is a monetary from policy that's authorized of country encharces
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Essay about Microsoft
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economic is the wealth of a country.
monetary policy is refer to as being expansionary or contractionary.
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money market is base on short term loan which is within one year period while capital market is long term loan more than one year...
money market is a market were short term loans are dealt with while capital market is a market were long term loans are traded
What is mean by monetory policy
monetary polices are rules that control the rate of monetary exchange in an economic as a whole.
wealth of the nation
important of unemployment
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Important of unemployed
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Scarcity can be define as human wants to goods,services,resources for exceed of what is available
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Can be defined as the inability to get everything we want
less ability for the available goods and services that's on sale
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by export trading
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economic is a wealth of nation
in the view of Adam Smith economics is the study of activities of people in production of wealth
Economics is any human activity that lead to the provision of substance and or amassing wealth.

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Source:  OpenStax, Principles of economics. OpenStax CNX. Sep 19, 2014 Download for free at http://legacy.cnx.org/content/col11613/1.11
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