01 Intro

Assumptions of Classical Economics¶

1. stable & well-defined preferences
2. rational behavior
3. maximize utility function (happiness, etc)
4. only have self-interest
5. People don’t care about others’ interests

6. No peer-pressure

7. risk-averse

8. Perfect Bayesian information processors
9. process information optimally
10. pay perfect attention to all details

11. don’t forget information

12. No biases

13. preferences over final outcomes, not changes
14. no “taste” for beliefs/information; purely objective

These may seem like we are making very incorrect assumptions. But these assumptions are required to understand the main concepts. For more accurate modelling, we use Behavioral Economics

Trade¶

Voluntary transaction between parties, resulting in their betterment.

Trade offs are there as everything has pros/cons, gains/costs; other options could have been chosen, but did not as the customer takes the best option

Factors of Trade¶

Consumer¶

1. Preferences/Tastes
2. Cost (what is the amount expected of the customer)
3. Budget/Income (what is available to the customer)
4. Threshold/Willingness to make the trade

Manager¶

1. Price of factors
2. Cost of production
3. Revenue/profits

Handling Recession¶

Budget Deficit¶

Scenario where Govt Expenditure > Revenue. This happens a lot in developing countries, as they are trying to develop as rapidly as possible.

Opportunity Cost¶

Fraction that shows what is to be sacrificed to pick an option A instead of B.

This can be incorporated into daily life instead of regular pros/cons list, by adding a cost/benefit associated with every factor for a decision.

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