Chapter 1, Problem 1P

To determine

The principles used in the given case.

Concept Introduction:

Principles of Individual Choice:

• “Choice is necessary because resources are scarce”- Resources are always scarce in respect to its use, a single resource can be put to various alternative uses. Therefore, one has to choose between the various uses.
• “The true cost of something is its opportunity cost”- The value of any commodity is derived from the forgone cost to get that particular commodity.
• “How much is the decision at the margin”- The choice of having something depends on the benefits one receive from that choice.
• “People usually exploit opportunities to make them better off”- People are always fond of alternative incentive, which can make them in better situation as compared to the previous situation.
• “Gains from trade”- Individual always gain from trade by selling the product in which they are specialized and purchasing the product in which they are comparatively less specialized.
• “Market moves towards equilibrium”- Market always tries to settle down at a point where no individual is comparatively better off in changing his choice.
• “Resources should be used efficiently to achieve society’s goals”- Resources should be used in such a way that will not make any better off by making the other individual worse off.
• “Markets usually lead to efficiency”- People always look for the opportunity, which can make them better off without making any other person worse off, this leads to efficiency in the market.
• “When markets don’t achieve efficiency, government intervention can improve society’s welfare”- Government intervention is required when the market do not correct itself.
• “One person’s spending is another person’s income”- The economy will always go on because a person earns only when the other person spends.
• “Overall spending sometimes gets out of line with the economy’s productive capacity”- The economy can face inflation at the time when spending of whole economy raises all together.
• “Government policies can change spending”- Various fiscal and monetary policies of government are used to correct the situation of the economy and adjust the spending.