Chapter 1, Problem 1QFT

To determine

Illustration of twelve principles of economics in each of the given cases.

Concept Introduction:

Principles of Individual Choice:

1. “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.
2. “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.
3. “How much is the decision at the margin”- The choice of having something depends on the benefits one receive from that choice.
4. “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.
5. “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.
6. “Market moves towards equilibrium”- Market always tries to settle down at a point where no individual is comparatively better off in changing his choice.
7. “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.
8. “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.
9. “When markets don’t achieve efficiency, government intervention can improve society’s welfare”- Government intervention is required when the market do not correct itself.
10. “One person’s spending is another person’s income”- The economy will always go a person earns on because only when the other person spends.
11. “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.
12. “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.

Explanation of Solution

• The empty seats of plane and empty beds of hotel were analyzed and alternate action was taken to earn revenue from these seats, therefore in this case the principle used is“The true cost of something is its opportunity cost”.

• Some passengers like to book their seats in advance whereas some like to wait for the last minute;therefore, in this case the principle used is “How much is the decision at the margin”.

• A way found by price line to make everyone better off, including itself;therefore, in this case the principle used is“People usually exploit opportunities to make them better off”.

• The spending of travelers is the earnings for hotel owners;therefore, in this case the principle used is “One person’s spending is another person’s income”.