Apex Investment Services "Why The Markets Reflect The Economy Part 1"

Apex Investment Services "Why The Markets Reflect The Economy Part 1"

Apex Investment Services "Why The Markets Reflect The Economy Part 1"

Although economics has many facets, the field is unified by several central ideas. In this 3 part series, we will take a closer look at Ten Principles of Economics. There is no question as to what an economy is. Whether we are talking about the economy of Los Angeles, England, or Australia, a healthy economy is based on several distinct variables. Because the behavior of an economy reflects the behavior of the individuals who make up the economy, we start this series with four principles of individual decision making.

Principle 1: People Face Trade-offs

"There is no such thing as a free lunch." To get one thing that we like, we usually have to give up another thing that we like. Nonetheless, acknowledging life's trade-offs is important because people are likely to make good decisions only if they understand the options that they have available.

Principle 2: The Cost of Something Is What You Give Up to Get It

Because people face trade-offs, making decisions requires comparing the costs and benefits of alternative courses of action. In many cases, however, the cost of some action is not as obvious as it might first appear.

Principle 3: Rational People Think at the Margin

Economists normally assume that people are rational. Rational people systematically and purposefully do the best they can to achieve their objectives, with the opportunities they have.

Michael Leary of Apex Investment Services says that rational people know that decisions in life are rarely black and white but usually involve shades of gray. Economists use the term marginal changes to describe small incremental adjustments to an existing plan of action.

Principle 4: People Respond to Incentives

An incentive is something that induces a person to act. Because rational people make decisions by comparing costs and benefits, they respond to incentives. You will see that incentives play a central role in economics.

Incentives are crucial to analyzing how markets work. For example, when the price of an apple rises, people decide to eat more pears and fewer apples because the cost of buying an apple is higher. At the same time, apple orchards decide to hire more workers and harvest more apples because the benefit of selling an apple is also higher.

When analyzing any policy, we must consider not only the direct effects but also the indirect and sometimes less obvious effects that work through incentives. If the policy changes incentives, it will cause people to alter their behavior.

The series is Part 1 of a three part series titled how the "How the Markets reflect the economy ." If you would like to read the entire series then please visit our website. http://www.apexinvestmentservices.net

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