Chapter 1, Problem 1P

To determine

Determine:

The principle of economics in each situation

Principles of Economics

Principles of economics refer to those generally accepted principles which are the basis of various economic analyses.

To Identify:

Relevant principles for the given statement.

Explanation of Solution

1. Budget Constraint

The prices of same items are less at discount stores as compared to general departmental stores. So, money can be saved, and this saved amount of money can be utilized to buy more items.

Conclusion:

Amount to buy items is limited. So, ‘Principle - Budget Constraint’ is applicable.

2. Resources are scarce.

Budget is limited to $35 per day. So, choices should be adjusted according to the budget.

Conclusion:

Choices need to be adjusted in fixed daily budget. So, ‘Principle- Resources are scarce’ is applicable.

3. People usually exploit opportunities to make themselves better off.

Students sell their used items instead of giving those to other students free of cost. It shows that students are making themselves better off by earning money.

Conclusion:

Here, students are exploiting the opportunity of selling books. So, ‘Principle - People usually exploit opportunities to make themselves better off’ is applicable.

The demand of building material and workers goes high post hurricane

damage caused by, but the supply is limited. Demand and price always have a direct relationship. Therefore, price of material and services rose high.

Conclusion:

Due to high demand, prices get high. So, ‘Principle - Overall spending sometimes gets out of line with economy’s productive capacity’ is applicable.

4. One person’s spending becomes another person’s income.

The money spent by a friend to buy a book becomes the income of another friend, who sells the book.

Conclusion:

One friend’s spending is another’s earning. So, ‘Principle - One person’s spending becomes another person’s income’ is applicable.

5. Marginal decision.

Deciding on the number of coffee cups based on the amount of work an extra cup will lead to, shows a marginal decision.

Conclusion:

Here, the decision of coffee cups depends upon the margin of time & work. So, ‘Principle - Marginal decision is applicable’.

6. Resources are scarce.

Lab space and time for students are limited which shows resource scarcity.

Conclusion:

Lab space needs to be adjusted. So, ‘Principle - Resources are scarce’ is applicable.

7. The real cost of something is its opportunity cost.

Giving up the semester of abroad study for graduating a semester early shows the sacrifice of one thing to get another, which is the principle of opportunity cost.

Conclusion:

Here, to choose one option, another option needs to be sacrificed. So, ‘Principle - The real cost of something is its opportunity cost’ is applicable.

8. Market move towards equilibrium.

Bikes of all qualities (higher or lower) are sold for same prices, which means no bike can be sold at a higher price.

Conclusion:

Here, the price for all the bikes is same. So, ‘Principle - Market move towards equilibrium’ is applicable.

9. Gains from trade.

One is good at lab experiments and another is good at writing reports. So, sharing of the work according to the skills shows the principle of gains from trade.

Conclusion:

Here, work is divided on the basis of specialization. So, ‘Principle - Gains from trade’ is applicable.

10. When the market does not achieve efficiency, government intervention can improve society’s welfare.

If driving license will not be mandatory, then people will not care about their driving skills and it will increase the risk of accidents. So, to avoid such situations, the government has mandated to get a driving license on the basis of exam.

Conclusion:

Here, the government has made driving licensing mandatory for society’s benefit. So, ‘Principle - When market doesn’t achieve efficiency, government intervention can improve society’s welfare’ is applicable.

11. Government policies can change spending.

To reduce the tax, parents have increased the allowance of their children, which will directly result in spending capacity.

Conclusion:

Here, government tax policies change the spending capacity. So, ‘Principle - Government policies can change spending’ is applicable.