- People face tradeoffs.
Scenario 9: You worked for extra pay on a holiday and therefore missed out on your neighbors’ barbeque.
In economics, one is required to trade one goal for another when making a decision. It is impossible to get everything you want at the same time meaning people face trade offs. To get something want, we have to give up another we also want (Mankiw, 2014). Scenario 9 best fits this principle because it is impossible to be at work and at the neighbors’ barbeque at the same time thus the barbeque was foregone.
- The cost of something is what you give up to get it.
Scenario 3: At a restaurant, when ordering an entrée, you get to choose two side dishes from a group of five side dishes.
When people face trade off, cost-benefit analysis is important (Mankiw, 2014). Opportunity cost is the loss of potential gain when one alternative is foregone for another. When choosing the two side dishes out of the five side dishes, the opportunity cost of each alternative must be considered. The opportunity cost in this case is the three side dishes that will be fore gone.
- Rational people think at the margin.
Scenario 4: Instead of growing your own food and making other necessities you decide to specialize in a particular profession and purchase things, even things that you would have not been able to make yourself.
The underlying assumption in economics is that people are rational. Rational is defined as decisively and logically doing your best to achieve certain goals (Mankiw, 2014). The goal in this case is to be able to live by affording food and other necessities. However, you cannot make all your necessities. On the other hand, specializing in an income allows you to make an income and the income can be used to buy those necessities you could not afford. Therefore you are able to achieve your goals by being rational.
- People respond to incentives.
Scenario 1: Even though generally more expensive, energy efficient appliances and vehicles sell better with a rebate or tax credit.
The rebate and tax credit serve as an incentive to attract customers to buy the expensive energy efficient appliances. People’s decisions are guided by benefit (Taussig, 2007). The energy efficient appliances are of benefit and are cost inexpensive. However, their high costs make them less attractive. The rebate and tax credit increases peoples desire to buy them.
- Trade can make everyone better off.
Scenario 2: Airlines will charge a fee for each additional suitcase you may want to take with you on a trip.
Scenario 4 best fits this principle because trade is mutually beneficial. Trade is not a competition where for one side to gain the other has to lose (Dwivedi, 2010). In scenario four, the airline will gain financially from every extra suitcase. On the other hand, as a passenger, I am allowed to carry as many suitcases as I can. Both the airline and I benefit mutually.
- Markets are usually a good way to organize economic activity.
Scenario 5: There is an incredible variety of goods and services available at many different price points even though no single entity or government is deciding or dictating the market what to do.
Scenario 5 best explains the sixth principle that is based on market economy (Mankiw, 2014). Market economy is system of economics in which prices of services and goods are guided by the interaction between citizens and businesses without government interference. In Scenario 5, there is government or a single entity guiding economic decisions.
- Governments can sometimes improve market outcomes.
Scenario 10: Two major suppliers of powdered baby food formula are challenged by government on grounds of price fixing.
When market economies fail, the government must intervene. Governments intervention is brought by different factors among them market power. Market power is the ability of a business or major business to control prices in the economy (Mankiw, 2014).
- A country’s standard of living depends on its ability to produce goods and services.
Scenario 7: While consuming the same amount of farmers’ labor and capital, the newly developed hybrid crops achieve twice the yields of the previous crops.
Productivity determines a country’s living standards. High productivity indicates high living standards (Taussig, 2007). Boosting living standards requires a raise in productivity. The new hybrid crops achieved high production thus boosting the living standards of the farmer.
- Prices rise when the government prints too much money.
Scenario 8: You have noticed that the same amount of money buys you fewer goods and services than it did a year ago
Inflation is an increase in prices of commodities and the fall in the value of money. Inflation occurs when there is too much money in circulation thus the value of money falls (Dwivedi, 2010). Inflation is occurs when the government prints too much money causing an increase of prices. Scenario best describes this principle because the value of money has decreased.
- Society faces a short-run tradeoff between inflation and unemployment.
Scenario 6: In its effort to limit the effects of rising inflation, the Federal Reserve System reduces the quantity of money in the economy, but sees an increase in unemployment
An increase of money in the economy causes an increase in expenditure (Mankiw, 2014). An increase in expenditure increases the demand for goods and services. As a result of this increased demand, people are hired to create this goods and services. Therefore, reducing the quantity of money in the economy reduces expenditure leading to decreased productivity. As a result, people lose their jobs.
Dwivedi, D. N. (2010). Principles of economics. New Delhi: Vikas Publishing House Pvt. Ltd.
Mankiw, N. G. (2014). Principles of economics. 7th Edition
Taussig, F. W. (2007). Principles of economics. New York: Cosimo Classics.