The paper entails matching the different scenarios provided with the relevant principle of economics.
- People face tradeoffs. Scenario: you worked for extra pay on holiday and, therefore, missed out on your neighbor’s barbeque. There is nothing that is free, and for individuals to get what they like, they will have to give up another thing that they like (Mankiw, 2014). To receive an extra pay, the person had to miss the barbeque. Similarly, an individual had to make a choice between barbeque and extra pay.
- The cost of something is what you give up to get it. Scenario: at a restaurant, when ordering an entrée, you get to choose two sides dishes from a group of five side dishes. It is also known as opportunity cost, and a person will make a decision of choosing what he/she considers as convenient for the cost.
- Rational people think at the margin. Scenario: airline will charge a fee for each additional suitcase you may want to take with you on a trip. Individuals may not think about the additional cost or the number of suitcases they might take, what they only think about is going for that trip.
- People respond to incentives. Scenario: even though generally more expensive, energy-efficient appliances and vehicles sell better with a rebate or tax credit. For this case, when the price of vehicles rises, consumers have an incentive to buy fewer automobiles. Also, car producers have an incentive to hire more employees and produce more vehicles.
- Trade can make everyone better off. Scenario: instead of growing your own food and making other necessities you decided to specialize in a particular profession and purchase things, even things that you would not have been able to make yourself. Since trade can make everyone better off, countries or people involved in trade should not expect to lose or win. Therefore, trade among countries or individuals allows for specialization hence improving the welfare of everyone (Mankiw, 2014).
- Markets are usually a good way to organize economic activity. Scenario: there is an incredible variety of goods and services available at many different prices point even though no single entity or government is deciding or dictating the market what to do. In a market economy, the prices reflect the value of the goods and the cost of the resources used to produce the goods (Mankiw, 2014). Similarly, the invisible hand guides the market to a favorable outcome, and that is why there is no need for the government or business entities to dictate the market.
- The government can sometimes improve market outcomes. Scenario: two major suppliers of powdered baby food formula are challenged by the government on grounds of price fixing. The two major suppliers of powdered baby food can benefit from the government’s actions. When the government challenges the suppliers to have a fixed price, the results of the action can boost their sales.
- A country’s standard of living depends on its ability to produce goods and services. Scenario: while consuming the same amount of farmers’ labor and capital, the newly developed hybrid crops achieved the yields of the previous crops. The policy makers can boost the standard of living of the people by raising the country’s productivity (Stiglitz, Walsh, Gow, Guest, Richmond, & Tani, 2013). The productivity will increase by educating the workers and using the best technology. Therefore, in the scenario, hybrid crops are more dependable than regular crops because they are not affected by many variables. When a farmer uses hybrid crops, he/she will harvest more output.
- Prices rise when the government prints too much money. Scenario: you noticed that the same amount of money buys you fewer goods and services than it did a year ago. Inflation entails the overall increase in prices of goods and services in the country (Stiglitz, Walsh, Gow, Guest, Richmond, & Tani, 2013). Therefore, when the government prints more money, the amount of money in circulation will increase hence causing inflation. Inflation will then affect the prices of goods and services in the economy.
- Society faces a short-run tradeoff between inflation and unemployment. Scenario: 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. When the Federal Reserve System reduces inflation, it will cause a temporary rise in the rate of unemployment (Mankiw, 2014). However, the tradeoff is significant for understanding the short-run effect of changes made by the Federal Reserve System.
Mankiw, N. G. R. E. G. O. R. Y. (2014). Principles of macroeconomics. Cengage Learning.
Stiglitz, J. E., Walsh, C. E., Gow, J., Guest, R., Richmond, W., & Tani, M. (2013). Principles of economics. John Wiley & Sons.
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