Question

Each scenario below practices one of the 12 Principles of Economics. Match the principles to the appropriate scenario listed and justify your answer. A principle will only be used once, and not all principles are used.  

The 12 Principles of Economics:

1. People must make choices because resources are scarce.

2. The opportunity cost of an item — what you must give up in order to get it — is its true cost.

3. “How much” decisions require making trade-offs at the margin: comparing the costs and benefits of doing a little bit more of an activity versus doing a little bit less.

4. People usually respond to incentives, exploiting opportunities to make themselves better off.

5. There are gains from trade.

6. Because people respond to incentives, markets move toward equilibrium.

7. Resources should be used as efficiently as possible to achieve society’s goals.

8. Because people usually exploit gains from trade, markets usually lead to efficiency.

9. When markets don’t achieve efficiency, government intervention can improve society’s welfare.

10. One person’s spending is another person’s income.  

11. Overall spending sometimes gets out of line with the economy’s productive capacity.

12. Government policies can change spending.

Scenarios

1. Even though generally more expensive, energy efficient appliances and vehicles sell better with a rebate or tax credit.

2. Airlines will charge a fee for each additional suitcase you may want to take with you on a trip.

3. At a restaurant, when ordering an entrée, you get to choose two side dishes from a group of five side dishes.

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.

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.

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

7. While consuming the same amount of farmers’ labor and capital the newly developed hybrid crops achieve twice the yields of the previous crops.

8. You have noticed that the same amount of money buys you fewer goods and services than it did a year ago.

9. You worked for extra pay on a holiday and therefore missed out on your neighbor's’ barbeque.

10. Two major suppliers of powdered baby food formula are challenged by government on grounds of price fixing.

Answer 1

1. Even though generally more expensive, energy efficient appliances and vehicles sell better with a rebate or tax credit. People usually respond to incentives, exploiting opportunities to make themselves better off. People generally consider benefits more than the cost of the purchase.

2. Airlines will charge a fee for each additional suitcase you may want to take with you on a trip.- Because people respond to incentives, markets move toward equilibrium. Here, both the parties will benefit as the airlines is getting more money and the consumer will get to take the extra luggage by paying a bit more.

3. At a restaurant, when ordering an entrée, you get to choose two side dishes from a group of five side dishes. - How much” decisions require making trade-offs at the margin: comparing the costs and benefits of doing a little bit more of an activity versus doing a little bit less. The people are rational and study the market to understand the best options available to satisfy their hunger.

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. There are gains from trade. As per the definition, "Gains from trade are the net benefits to economic agents from being allowed an increase in voluntary trading with each other." Also, specialization is the key to benefit from providing the good in which the person is specialized and buying all other things.

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. Because people usually exploit gains from trade, markets usually lead to efficiency. Market forces generally adjust themselves to achieve economic stability.

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-  One person’s spending is another person’s income.   There is a tradeoff between inflation and unemployment. Higher unemployment, the quantity of money should rise to increase the production of goods which in turn, will lead to increase in employment.

7. While consuming the same amount of farmers’ labor and capital the newly developed hybrid crops achieve twice the yields of the previous crops. Resources should be used as efficiently as possible to achieve society’s goals. The resources should be utilized in an efficient manner in order to get the best possible outcome which will benefit the society as a whole.

8. You have noticed that the same amount of money buys you fewer goods and services than it did a year ago. Government policies can change spending. Inflation is the key which result in rise in prices of goods making it expensive. So, the person can now buy fewer quantity as compared to before with the same amount of money.

9. You worked for extra pay on a holiday and therefore missed out on your neighbor's’ barbeque. – The opportunity cost of an item — what you must give up in order to get it — is its true cost. Opportunity cost is the forgone benefit that would have been derived by an option not chosen. So, here extra pay is chosen over the neighbor's barbeque.

10. Two major suppliers of powdered baby food formula are challenged by government on grounds of price fixing. When markets don’t achieve efficiency, government intervention can improve society’s welfare. In this case, the government has to intervene to improve the market outcomes.