Economics World Bank Questions
The basic principles of economics include:
1. Scarcity: Resources are limited, while human wants and needs are unlimited. This scarcity necessitates choices and trade-offs.
2. Opportunity Cost: When making a choice, the value of the next best alternative foregone is the opportunity cost. It reflects the trade-off involved in decision-making.
3. Supply and Demand: The interaction between supply and demand determines prices and quantities in a market. When demand exceeds supply, prices tend to rise, and vice versa.
4. Marginal Analysis: Decisions are made by comparing the additional benefits (marginal benefits) with the additional costs (marginal costs). Rational decision-making involves choosing an option if the marginal benefits outweigh the marginal costs.
5. Incentives: People respond to incentives, which can be positive (rewards) or negative (penalties). Incentives influence behavior and can shape economic outcomes.
6. Efficiency: Economic efficiency is achieved when resources are allocated to maximize overall welfare. Efficiency can be achieved through productive efficiency (producing goods and services at the lowest cost) and allocative efficiency (allocating resources to meet society's preferences).
7. Market Failure: Markets may fail to allocate resources efficiently due to externalities (costs or benefits imposed on third parties), public goods (non-excludable and non-rivalrous goods), or imperfect competition. In such cases, government intervention may be necessary to correct market failures.
8. Macroeconomics and Microeconomics: Macroeconomics focuses on the overall performance and behavior of the economy as a whole, including factors like inflation, unemployment, and economic growth. Microeconomics examines the behavior of individual consumers, firms, and markets.
These principles provide a framework for understanding and analyzing economic behavior and decision-making at both individual and societal levels.