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1. Define Economics. What is an Economic Problem?

Economics is a social science concerned with the production, distribution and

consumption of goods and services. It studies how individuals, businesses, governments
and nations make choices on allocating resources to satisfy their wants and needs, and
tries to determine how these groups should organize and coordinate efforts to achieve
maximum output.

The economic problem sometimes called the basic or central economic problem
asserts that an economy's finite resources are insufficient to satisfy all human wants and
needs. It assumes that human wants are unlimited, but the means to satisfy human
wants are scarce.

Though unrelated...

Quote- The World is enough for everybodys needs but not for everybodys Wants.

2. Explain the Scarcity Principle with an example .

Scarcity refers to the basic economic problem, the gap between limited that is,
scarce resources and theoretically limitless wants. This situation requires people to
make decisions about how to allocate resources efficiently, in order to satisfy basic
needs and as many additional wants at possible. Any resource that has a non-zero
cost to consume is scarce to some degree, but what matters in practice is relative
Also referred to as "paucity."


In his 1932 Essay on the Nature and Significance of Economic Science, British
economist Lionel Robbins defined the discipline in terms of scarcity:

Economics is the science which studies human behaviour as a relationship

between ends and scarce means which have alternative uses.

In a hypothetical world in which every resourcewater, hand soap, expert

translations of Hittite inscriptions, enriched uranium, timewas abundant,
economists would have nothing to study. There would be no need to make decisions
about how to allocate resources, and no tradeoffs to explore and quantify. In the
real world, on the other hand, everything costs something; in other words, every
resource is to some degree scarce.

3. Explain the Cost-Benefit Principle with an example .

1 The cost benefit principle is an accounting concept that states benefits from an
accounting system should always outweigh the costs associated with it

2 Ie, to, Take no action unless its marginal benefit is at least as great as its marginal

3 An individual (or a firm or a society) should take an action if, and only if, the extra
benefits from taking the action are at least as great as the extra costs.

4. Define the following terms.

a. Reservation Price

Reservation (or reserve) price is a term referring to a limit on the price of a

good or a service. On the demand side, it is the highest price that a buyer is
willing to pay; on the supply side, it is the lowest price at which a seller is
willing to sell a good or service

b. Opportunity Cost

Opportunity costs can also be thought of as the resources lost, or alternate

products forgone, through taking a particular action or producing a certain
product. The lost resources could be time, effort, money, goods, etc.

c. Marginal Cost

This can be compared with average total cost or ATC, which is the
total cost divided by the number of units produced and does include
fixed costs. For discrete calculation without calculus, marginal cost equals the
change in total (or variable)cost that comes with each additional unit

d. Marginal Benefit

A marginal benefit is the additional satisfaction or utility that a person

receives from consuming an additional unit of a good or service. A
person's marginal benefit is the maximum amount he is willing to pay to
consume that additional unit of a good or service.


N. Gregory Mankiw, Principles of Economics (Mankiw's Principles of Economics) 6th

Edition, ISBN-13: 978-0538453059, ISBN-10: 0538453052.