What are the four Principles we have to know in order to understand the question “How people make decisions”. Explain all of them in detail, please.

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What are the four Principles we have to know in order to understand the question “How people make decisions”. Explain all of them in detail, please.

People Face Tradeoffs.

1. People Face Tradeoffs.

To get one thing, you have to give up something else. Making decisions requires trading off one goal against another.

2. The Cost of Something is What You Give Up to Get It.

Decision-makers have to consider both the obvious and implicit costs of their actions.

3. Rational People Think at the Margin.

A rational decision-maker takes action if and only if the marginal benefit of the action exceeds the marginal cost.

4. People Respond to Incentives.

Behavior changes when costs or benefits change.

3. What are the three Principles we have to know in order to understand the question “How People Interact”. Explain all of them in detail, please.

Trade Can Make Everyone Better Off.
Trade allows each person to specialize in the activities he or she does best. By trading with others, people can buy a greater variety of goods or services.
Markets Are Usually a Good Way to Organize Economic Activity.
Households and firms that interact in market economies act as if they are guided by an "invisible hand" that leads the market to allocate resources efficiently. The opposite of this is economic activity that is organized by a central planner within the government.
Governments Can Sometimes Improve Market Outcomes.
When a market fails to allocate resources efficiently, the government can change the outcome through public policy. Examples are regulations against monopolies and pollution

4. What are the three Principles we have to know in order to understand the question “How the Economy as a whole works”. Explain all of them in detail, please.

A Country's Standard of Living Depends on Its Ability to Produce Goods and Services.
Countries whose workers produce a large quantity of goods and services per unit of time enjoy a high standard of living. Similarly, as a nation's productivity grows, so does its average income.
Prices Rise When the Government Prints Too Much Money.
When a government creates large quantities of the nation's money, the value of the money falls. As a result, prices increase, requiring more of the same money to buy goods and services.

Society Faces a Short-Run Tradeoff Between Inflation and Unemployment.
Reducing inflation often causes a temporary rise in unemployment. This tradeoff is crucial for understanding the short-run effects of changes in taxes,government spending and monetary policy.

You must decide whether or not to attend graduate school (Master Degree) after your graduation of Alma University. How might you use marginal analysis to make your decision? What principles would help you to do so?

We use one of the tens principle of economic is “How people make decision” The cost of something is what you give up to get it.
Whether to go to class or sleep in?
Whether to go to college or to work?

The opportunity cost of an item is what you give up to get that item.

Chapter 5

Consider the following pairs of goods. Which would you expect to have the more elastic demand? Explain each of your answer in detail.

a. water or diamonds
Necessities differ from luxury goods because while the demand for necessities remains relatively constant, the demand for luxury goods fluctuates depending upon income and prices. Luxury goods have high income elasticity of demand which means as people become wealthier, they will buy more and more of the luxury good. This also means that if there was a decline in income, its demand will drop. With a shortage of income, less people are willing to buy expensive and unnecessary goods. However, necessities are always important.

You are the owner of the Canteen on campus in SDU, and you know that the price elasticity of demand for your pizza is 0.5. What will happen to your total revenue from your pizza sales if you raise your prices? Prove your answer on the graph.

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Asset, a fisherman, goes out with a boat and a net early each morning. At 7:00 a.m., Asset takes his day's catch to the fish market and sells it at the market price. As a result of new information about the beneficial effects on health of a fish-rich diet, the demand for fish increases. How will Jack's supply of fish respond to the increased demand and higher price for his product in the short run and in the long run?

In the very short run, a period of one day, Asset cannot respond at all to theincreased price of fish, since his supply is perfectly inelastic. In the short run, Asset canrespond to the higher price by using more labor and nets to catch more fish. In the long run, Asset can also add more boats to the production process and catch even more fish. The longerthe time horizon, the more elastic will be Asset's supply of fish

8. In the 1970s, OPEC caused a dramatic increase in the price of oil. What prevented it from maintaining this high price through the 1980s? Graph your answer as well.
In 1973 OPEC raised the price of crude oil in world markets. Because crude oil is the major input used to make gasoline, the higher oil prices reduced the supply of gasoline. The price of oil rose 14 percent in 1979, followed by 34 percent in 1980, and another 34 percent in 1981. A REDUCTION IN SUPPLY IN THE WORLD MARKET FOR OIL. When the supply of oil falls, the response depends on the time horizon. In the short run, supply and demand are relatively inelastic, as in panel (a). Thus, when the supply curve shifts from S1 to S2, the price rises substantially. By contrast, in the long run, supply and demand are relatively elastic, as in panel (b). In this case, the same size shift in the supply curve (S1 to S2) causes a smaller increase in the price.

Why do farmers suffer declines in their total revenues when they become more productive as a group? You must demonstrate your answer on the graph. (Hint: Why good news for farming can be bad news for farmers).

if farmers are made worse off by the discovery of this new hybrid, why do they adopt it? The answer to this question goes to the heart of how competitive markets work. Because each farmer is a small part of the market for wheat, he or she takes the price of wheat as given. For any given price of wheat, it is better to use the new hybrid in order to produce and sell more wheat. Yet when all farmers do this, the supply of wheat rises, the price falls, and farmers are worse off.
When an advance in farm technology increases the supply of wheat from S1 to S2, the price of wheat falls. Because the demand for wheat is inelastic, the increase in the quantity sold from 100 to 110 is proportionately smaller than the decrease in the price from $3to $2. As a result, farmers’ total revenue falls from $300.( $3*100) to $220 ($2*110)

Chapter 6

Why didn’t the 1990 luxury tax which Congress placed on buyers of yachts, private airplanes, furs, jewelry, expensive cars, and similar items succeed in raising revenue primarily from the rich? (Case study: explain in detail). Demonstrate your answer on the graph.

Even though the items affected by the luxury tax are, indeed, bought primarily by the wealthiest taxpayers, the price elasticity of demand for luxury goods is high relative to the price elasticity of supply. Hence, when the tax was imposed on those goods, there was a significant reduction in quantity demanded and only a slight increase in equilibrium market price. The burden of the tax fell mostly on the suppliers, who suffered a substantial reduction in the price they received, and a substantial reduction in the quantity sold and in total revenue.

Chapter 7

1. Explain in detail what consumer surplus is, taking into account relationship between the demand curve and the willingness to pay and show how it is measured?

Consumer surplus measures the benefit to buyers of participating in a market. It is measured as the amount a buyer is willing to pay for a good minus the amount a buyer actually pays for it. For an individual purchase, consumer surplus is the difference between the willingness to pay, as shown on the demand curve, and the market price. For the market, total consumer surplus is the area under the demand curve and above the price, from the origin to the quantity purchased.

2. Megan loves donuts. The table shown reflects the value Megan places on each donut she eats:

ANSWER: a.
b. At a price of $.20, Megan would buy 5 donuts.

3. Other things equal, what happens to producer surplus when the price of a good rises? Illustrate your answer on a supply curve.

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