Category: Basic Principles

Behavioral economics is a method of economic analysis that applies basic psychological insights to people’s behavior to explain their actions and decision-making. It is a valuable addition to conventional economic theory because it adds a human element, which can help to explain certain inconsistencies and make economic models more applicable […]

In economics, we often assume that people act like what we call a Homo Economicus. That means they are always rational. More specifically, a Homo Economicus always maximizes utility (as a consumer) or profits (as a producer). To do this, they rationally weigh all the costs and benefits and always chose […]

Price elasticity of demand is a measure that shows how much quantity demanded changes in response to a change in price. It is calculated as the percentage change in quantity demanded divided by the percentage change in price (see also Elasticity of Demand). However, as you will notice sooner or later, […]

The production possibility frontier (PPF) is a graph that shows all maximum combinations of output that an economy can achieve, when available factors of production are used effectively. It is also known as the transformation curve or the production possibility curve. The PPF is a great concept because it beautifully […]

Economic profit is defined as the difference between total revenue and total cost, including both explicit and implicit cost. The inclusion of implicit cost is what separates economic profit from the more common accounting profit (which only accounts for explicit cost). Even though the latter is more commonly used in […]

Marginal revenue is defined as the revenue gained by producing one more unit of a product or service. Therefore, it is sometimes also referred to as the revenue of the last unit. In economics, the concept of marginal revenue is very important because it helps firms to make efficient production […]

In the field of behavioral economics, we often come across the term utility (see also key insights from behavioral economics). In this context, utility refers to the perceived value (i.e., usefulness) an individual receives when they purchase a good or service. There are four different types of utility: form utility, […]

Supply and demand functions play a crucial role in economics. They help us analyze and understand the most fundamental economic concepts and issues (e.g., the law of supply and demand, calculating producer surplus). For the sake of simplicity, we often assume them to be linear, which makes it much easier […]

In economics, supply and demand functions come in many shapes and sizes. However, for the sake of simplicity, we often assume they are linear. That makes it much easier to compute them, which in turn is important to analyze and understand many basic economic concepts (e.g., calculating consumer surplus). Therefore, […]

To analyze and understand firms’ production decisions it is important to know the different types of costs they face during this process. There are a number of different types of costs of production that you should be aware of: fixed costs, variable costs, total cost, average cost, and marginal cost. […]