Question

Which of the basic principles of economic thinking is/are addressed, and explain why? Explain in your own words, what drives Able and Charlie to trade? What is/are the underlying assumption(s) that allow the trade to occur?

Answer 1

Answer: Principle -1 : PEOPLE FACE TRADE OFF

suppose as for example a student have an option either to choose study or to go outside and spend his / her time in watching movie in a theatre . so student face trade off between study and watching movie.

Principle - 2 : THE COST OF SOMETHING IS WHAT YOU GIVE UP TO GET IT :  

In order to get some thing you need to loss something . If we make decision to get something than we have to compare the cost and benefit related to it . suppose as for example if i choose not to study and instead of that i decide to earn some money . so here in order to earn some money i have to quit my education . here the benefit is that i am earning money and the opportunity cost is that which involve in quitting education.

Principle -3 RATIONAL PEOPLE THINK AT THE MARGIN :  

Rational people always wants to maximize their benefit so they always compare cost and benefit related to it. if marginal benefit is more than the marginal cost than only they will interested in anythig otherwise not. suppose i have decided to start a business than i will firstly compare cost and benefit related to it . if i am spending 10000 and i get only 5000 from this business than i will not going to invest further on it . As cost is greater than benefit so i as a rational people will not going to make investment on it.

Principle -4 PEOPLE RESPOND TO INCENTIVES

Suppose there are some employees in a company , company's owner decided to give bonus to employees if and only if they work hard and get extra effort to their output generation . employees will work more as they are getting more money . here people always compare cost and benefit and act accordingly . people in this example work more by getting more income .

suppose if tax on cigarette increases than people will prefer to buy less of it .

Principle-5 TRADE CAN MAKE EVERYONE BETTER OFF

Trade make everyone better off because trade allow individual to specialize in production of particular commodity . Due to trade different countries specialize in a particular commodity and exchange that commodity among themselves . so everyone become better off due to trade .

Principle - 6 MARKETS ARE USUALLY A GOOD WAY TO ORGANZE ECONOMIC ACTIVITY

There are two group in the economy , one is household and another one is firm . firm produces good and household provide labour , land , capital and organisation. here firm decision is to produce commodity and household decide to buy this goog produced by firm. according to adam smith to balance the equilibrium condittion in economy an invisible hand is working to balance it and there is no need for government intervention to balance the economy.

Principle -7 GOVERNMENT CAN SOMETIMES IMPROVE MARKET OUTCOMES

To balance the economy in some cases there is need for the intervention of the government . suppose there is a factory , that factory polluting air and also polluting water also . in such a case government need to impose some taxes so that they can control the level of pollution and also impose some restriction on pollution emmision amount .

Principle -8 THE STANDARD OF LIVING DEPENDS ON A COUNTRY'S PRODUCTION

As output generating capacity of an economy increases than their income increases and also their living standard also increase . here if a country's empolees are very poductive and produce large amount of output than their income will also increase and their living standard will also improve.

Principle - 9 PRICE RISE WHEN GOVERNMENT PRINT TOO MUCH MONEY

If government print too much money than this will create inflation. Due to print of so much money , value of money decreases . Here as money circulation is more than people will hold more money , and they have more money to spend . In this case purchasing power of the individual increases and they demand more and due to this suppliers increases price and this will create inflation in the economy.

Principle - 10 SOCIETY FACES A SHORT RUN TRADEOFF BETWEEN INFLATION AND EMPLOYMENT

Acccording to phillips curve in short run there is trade off between inflation and unemployment . that is there is inverse relationship between inflation and unemployment.