Principles of Economics in Decision-Making 1) The principles of economics influence your decision making, interaction with others, and the economy as a whole

1) The principles of economics influence your decision making, interaction with others, and the economy as a whole.
Part I: Give one example of how you are personally affected by each of the three areas.
Part II: How were these positive or negative effects?

Solution:

Part I:
Economics is a social science which studies the human behavior regarding the three major activities like consumption, production & distribution. In the decision making analysis, Price is in essence the means of communication in the market. By offering higher prices buyers signal their desire to buy more of a good or a resource to sellers. Sellers, on the other hand, communicate the information about the cost of a good or a resource to buyers through price.

For example, if I wish to consume some apples & if prices are very high, then I will reduce my consumption of apples or else I will postpone my consumption of apples. So price of goods & services influences the decision making to a greater extent.
Price becomes a medium of exchange between the buyers & sellers in the market. In each market it is the interaction of demand and supply that determines the price. For example my desire to purchase an apple & the producers desire to sell that apple will determine the equilibrium price. Thus the interaction between the buyers & sellers will determine the market price.
The transactions between many buyers & sellers leads to a market economy & a market economy functions through a vast network of individual markets bringing together buyers and sellers of various goods and services as well as resources available in the economy.
Part II:
The above effects were positive because my desire to purchase a particular product will leads to production decisions based on the available scarce resources & the interaction between the buyers & sellers will determine the market price. However, if price of a particular product is increasing, I will reduce my consumption, but this decision making will guide the producers in the market & they will act accordingly. So, any surplus or shortages in the market can be rectified automatically & equilibrium in the market economy will be reached.

2) List 3 characteristics of an economist as a scientist and 3characteristics of an economist as a policy advisor. How do an economist as a scientist and an economist as a policy advisor help to create understanding of economics? Please explain

Solution:

A statement is scientific only if it is open to the logical possibility of being found false. Many economists argue that empirical testing of economic theories is possible. Economic theory makes statements about how facts fit together, and there are constantly new sets of facts arising that allow one to test the theory to see whether the facts are as theory predicts. Besides, they rely on statistical procedures & data to draw conclusions.

But critics argue that testing of economic theories have many limitations. Most theories are based on various assumptions & economists hold some variables constant. So, testing of economic theories cannot be treated as pure science & accurate prediction is not possible. In fact, economics is more about describing what has already happened, rather than predicting what will happen.
However, based on the previous happenings economists can frame policies.

Economist as a scientist can prove the theories empirically & derive the facts. Thus, it helps to understand many economic theories. While economists as policy advisors will forecast & predict the happenings based on the policies. Besides the two major divisions like positive economics & normative economics can provide insight as how to set the goals &how they might best be achieved.