Reference no: EM133227218

Positive economics (economic knowledge that is empirically testable or falsified based on past data or experience), take into account opportunity costs when thinking about trade-offs. Opportunity cost is the value of the best alternative forgone. Economists think on the margin, which means taking into account the change in one variable in response to a change in another related variable. Marginal here means "incremental" hence the opportunity cost, the opportunity cost of having one more can of soda (incremental) is giving up a bag of chips. The opportunity cost of producing one more bushel of corn is one yard of clothing with given resources.

1.Give two examples of economic way of thinking and illustrate how the economic way of thinking applies to your examples. No two examples given in class should be the same.

It is important to understand the circular flow diagram where expenditures are equal to income in every economy. An economy operates like an individual. It spends money and earns money. At the end of the day, spending must equal income otherwise it cannot sustain itself. You can borrow money but at the end you will have to pay back money borrowed plus interest. Households create income by supplying their labor to the firms.

2.How does the circular flow diagram work?

3.Adam Smith is considered to be the father of Economics Which famous book did he write? What is the mechanism at work under the notion of "invisible hand?"

4.Who is John Maynard Keynes? What was his main contribution to Economics? Which famous book did he write?

5.Define the law of increasing cost and give examples from real life situations