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Economics Project - Assignment Example

The choices made by business firms are often influenced mainly by the principles of production function, cost analysis and supply theory. The important principles that influence choice are put forward by Mankiw, “People Face Tradeoffs, the Cost of Something is What You Give Up to Get It, Rational People Think at the Margin, People Respond to Incentives” (Principles of Economics par. 2). The economic principles laid down by Mankiw are clearly defined using the following theories and concepts. The principles of utility analysis are of two types- ordinal and cardinal. Cardinal utility analysis which states that utility is quantitatively measurable consists mainly of two analyses namely, diminishing marginal utility and equi-marginal utility. The law of diminishing marginal utility put forward by Alfred Marshall states that the utility derived from the additional units of a commodity diminishes as the stock of that commodity increases. The law of diminishing marginal utility helps the consumers to make choices on the basis of their marginal utility. Equi-marginal utility, on the other hand, states that the consumer will use his income to purchase two commodities in a combination of respective units that the utility derived from both the commodities will be the same. This principle helps the consumers to adjust the marginal utility of commodities in such a way that the marginal utilities derived from the both commodities would be equal. The choices of consumers are clearly revealed using equi-marginal

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utility. Another economic principle that helps the consumers in making choice is the indifference curve analysis, which is an ordinal concept. An indifference curve shows the preference of a consumer between two commodities and the satisfaction derived from consumption of the goods is the same along a particular indifference curve. A set indifference curves is known as indifference map. In a graph showing various indifference curves, the highest indifference curve is shows the highest level of satisfaction experienced by the individual when consuming the commodities. Therefore, the consumer chooses that point where the highest possible indifference curve is tangent to the consumer budget line. Other economic principles that help in the consumer choices are the theories of demand. The major demand theories are revealed preference theory of Samuelson and logical ordering theory of demand by J.R. Hicks. The revealed preference theory states that the consumers strongly reveal their choices out of the various alternatives made available to them and thus their choice reveals their preference. On the other hand, under the weak ordering preference, the indifference concept is neglected and the preference of consumers is weakly ordered so that the consumers are able to choose a higher preference when they want. Individual choices under the situation of risk and uncertainty are also answered through economic principles. The St. Petersburg paradox and the Bernoulli’s hypothesis are the primary principles that help the individuals to make choices at the face of risk and uncertainty. Neumann-Morgenstern utility concept also helps the consumers to make choice in a risky situation. Freidman-Savage hypothesis which is based on the marginal utility concept helps the consume
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Subject June 28, 2011 Economics Project Economic principles play a crucial role in the decision making of individuals, business firms and thus of society. The choices made by them are often influenced by these principles and this increases the scope of economics…
Economics Project Assignment
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