Question

Which of the 10 basic economic principles mentioned in chapter one is the most important in decision-making? Defend your answer.

Answer 1

Flow people make Decisions principle 1: - people face Tradeoffs. All decision invalve tradeoffs. Examplesbullet Going to party the night before your midterem leaves lesstime four studying. bullet Having more money to buy staff requires working longer hours. Which leaves less times for leisure. bullet society faces an important trade off efficiency vs equity. bullet efficiency: - getting the most out of scorce resource. bullet equity: - Distributing prosperity fairly among society�s members. bullet Tradeoff: - To increase equity could redistribute income from wealthy and poor. Principle 2): - The cost of something is what you give up to get it. bullet making decisions requires comparing the costs and benefits of alternative choices. bullet The opportunity cost of any item is whatever must be given up to obtain it. Examples. bullet The opportunity cost of going to college for a year is not just the tuition books and fees but also the foregone wages. Principle 3: - Rational people think at the margin. bullet A person is rational if she systematically and purposefully does the best she can to achieve her objectives. bullet when making decisions rationalconsumers and business people evaluate the costs and benefits of marginal changes incromental adjustments to an existing plan. Examples: - A firm considers whather to increase output comparing the cost of the needed labour and materials to the extra reverse. Principle 4: - People Respond to incentives. Incentive: - something that induces a person to act the prospect of a reward or punishment. bullet Rrational people respond to incentives. Examples. bullet when gas prices rise consumers buy more hybrid cars. bullet when cigarette taxes increase teen smoking falls. How people Interact Principle 5: -Trade can make everyone Better off. Rather than being self-sufficient People co specialize in producing one good or service and exchange it for other goods. bullet countries also benefits from trade and specoalization. bullet get a better price abroad for good they produce bullet Buy other goods more cheaply from abroad than could be produced at home. Principle 6: - markets are usually a good why to organize economic activity. bullet market: - a group of buyers and sellers. bullet organize economic activity means determine bullet what goods to produce. bullet how to produce them. bullet how much of each to produce. bullet who gets them. bullet In a market economy these decisions result from interactions of many housholds and firms. bullet The invisible hand works through the price systems: - bullet The interaction of buyers and sellers determines prices. bullet Each price reflects the good value to buyers and the cost of producing the good Principle 7: - Government can somethimes improve market outcomes. bullet Important role for govt: - enforec property rights. bullet People are less inclined to work, produce invest or purchase if large risk of their Property being stolen. bullet market failure: - when the market fails to allocate society�s resources efficiently. bullet Causes: - externalities: - when the production are consu,ption of a good affects bystanders. bullet market Power: - a single buyers or seller has substantial influence on market price. bullet Govt may alter market outcome to promate equity. bullet In such cases public policy may promote efficiency. How the economy as a whole works Principle 8: - A country�s standard of living depands on its ability to produce goods and services. bullet The most important determinant of living standards: productivity, the amount of goods and services produced per unit of labor. Productivity depands on equipment, skills and technology available to workers Principle 9: - prices rise when the government prints too much money. bullet inflation: - increase in the general level of prices. bullet In the long run: inflation is almost always caused by excessive growth in the quantity of money to fall witch causes the value of money to fall. bullet The faster the govt creaters money the greater, the inflation rate. Principle 10: - Society faces a shart reen trade off between inflation and unemployment. bullet In the shart run (1-2 years) many economic policies push inflation and unemployment in opposite directions. bullet other factors can make this trade off more or less favorable but the trade off is always present. Conclusion: - bullet Economics offers many insights about the behavior of peple markets and economies. bullet It is based on a few ideas that can be applied in many situations.