Chapter 1: The principles of Economics

Question for review

1. Give three examples of important trade-offs that you face in your life.

Ex 1: When I graduate from high school, I had to make a trade-off between

studying in other city and studying in a school near my house.

Ex 2: When I had a chance to change my class, I made a trade-off between

canceling 2 year in school to restart from beginning and staying in old class to
finish school in time.

EX 3: I decided whether to buy a new laptop.

2. What is the opportunity cost of seeing a movie?

The opportunity cost of seeing a movie is what you must give up to get it. Time is
the largest cost of seeing a movie. If you see a move, you will miss opportunity to
do other jobs such as doing your homework, cleaning your house, going to music
concert or playing some sports to improve your health. In case of that job brings
you a salary, the opportunity cost is amount of money you can earn in time you
watch a move. Besides, the money that you use for movie such as electricity
money (if you see a movie at home) money to buy a ticket (if you go to cinema) or
money for food and drink you eat during the film may be used for another thing.
Finally, sitting one place for an hour to see a movie is not good for your health.
Doing something more dynamically instead will be better for your body. So the
last opportunity cost is your health.

3. Water is necessary for life. Is the marginal benefit of a glass of water

large or small?
More than 70% surface of Earth is covered by water. Water plays a crucial role in
our life. It ensures the existence for every creature. However the marginal benefit
of a glass of water is very small. Because water is very plentiful, we are almost
easy to have it. So an extra glass of water would not yield very much. Unless you
have joined a marathon competition or you have walked under sunshine for
hours, marginal benefit of water is not large.

4. Why should policymakers think about incentives?

The policymakers should think more about incentives. Rational people respond to
incentives because they make decisions by comparing costs and benefits.
Moreover, many policies change the cost or benefit and, therefore, alter
consumer’s behavior. A tax on gasoline, for example, encourages people to drive
a smaller and more-efficient car or take public transportation. In other words,
change in policies directly impact on people’s incentives and thus, change life of
them. Therefore, policymakers must consider not only the direct effects but also
the less obvious indirect effects that work through incentives.

5. Why isn’t trade among countries like a game with some winners and
some losers?

Trade among countries isn’t like a game with some winners and some losers
because trade makes each country better off. By trading with other, everyone can
buy a great variety of goods and services at the lowest cost. Trade allows
countries to specialize in what they do best and thus, everyone have the highest
level of satisfaction.

6. What does the “invisible hand” of the marketplace do?

The invisible hand – price of goods and services in marketplace – directs every
economic activity. In any market, buyers consider the price when determining
considering how much to demand, and sellers look at the price when deciding
how much to supply. As a result, market price reflects both the value of goods
and services to society and the cost to society of making the goods and services.
Prices adjust to guide these individual buyers and seller reach outcome that, in
many cases, maximize the well-being of society as a whole.

7. Explain the two main causes of market failure and give an example of
each.

The two main causes of market failure are externality and market power.
Externality is impact of one person’s actions on the well-being of a bystander such
as pollution. Market power refers to the ability of single person (or a small group)
to unduly influence market price. For example, there is only one person who
supplies clothes in the town.

8. Why is productivity important?

Productivity is important because it reflects living standard of a nation. If a

nation’s productivity is high, this means that workers can produce a large quantity
of goods and services per unit of time, most people enjoy a high living standard.
On the contrary, in nations where workers are less productive, most people
endure a more meager existence. The greater a productivity of a country’s, the
greater its standard of living will be.

9. What is inflation and what causes it?

Inflation is an increase in the overall level of prices in the economy. When

government creates a large of nation’s money, that is the time inflation appear.

10.How are inflation and unemployment related in the short run?

There is an inverse relationship between inflation and unemployment rate in the

short run. When inflation is increase, unemployment rate will decrease. This will
be explained bellow: Increasing the amount of money in the economy stimulates
the overall level of spending and thus the demand for goods and services. Higher
demand may over time cause firms to raise their prices, but in the meantime, it
also encourages them to hire more workers and produce a larger quantity of
goods and services. More hiring means lower unemployment.

Problem and Applications

1.
a. A family deciding whether to buy a new car has to make a trade-off between
buying a new car and spending that money to do other things such as buying new
furniture or going on holiday in this summer.
b. A member of Congress decides how much to spend on national parks. If
spending so much money on national parks, budget for other structures is
reduced. So he must choose between money for national park and money saved
to spend on other items or tax cuts.
c. A company president decides whether to open a new factory. A trade-off is
between a new chance to earn more money and stability of old job.
d. A professor deciding how much to prepare for class faces a trade-off between
having a better class and spending that time and money for other thing such as
going to beauty salon or paying a visit to relatives’ home.
e. A recent college graduate deciding whether to go to graduate school make a
trade-off between taking part in an important event in his life and spending that
time on doing other thing such as going out with his friends.

2.
To compare between the cost of the vacation and benefits it brings me, I’ll answer
some questions about what I give up to get it:
Travelling make me feel relax and refresh. However, is the cost of vacation too
much to me? If I worked very hard to get the money, is it worth spending on a few
days just for fun? Do I feel comfortable when quit other jobs to going on holiday?
That is some comparisons about psychological benefits.
Besides, I should consider whether I can spend that time on earning more money
or join in other fun activities? Except a vacation, may I use the money for another
thing which brings me the same happy?
Answer these questions I’ll decide whether the cost of the vacation is worth
benefit it brings me.

3.
A friend asks you to go skiing on Saturday when you were planning to work at my
part-time job. The cost of going skiing is amount of money and time you must
spend on going skiing plus wages of days you quit your job to go skiing.
If my plan is spending Saturday studying at the library, the cost of going skiing in
this case is amount of money and time you must spend on going skiing plus the
knowledge you missed because you didn’t go to the library.
4.
Monetary opportunity cost of spending $100 now is $100 plus 5% interest every
year.
Nonmonetary opportunity cost: Putting $100 away for a year in a bank account,
after a year you’ll gain $105. If you spend it now, you’ll lose interest and chance of
investing for other projects in the future.

5.
You invested $5 million in developing new product and it has not finished.
However, your company’s turnover decreased to $3 million. So you lost $2 in
compared with your initial capital. If you don’t spend additional $1 million to put
an end to the project, it’ll be never finished and your company will can’t continue
making the products any more. You’ll lose total $5 million. Therefore you should
go ahead and maintain the development.

6.
After reading three suggestions of The Magic Potion Company’s managers, I
suppose Hermione’s idea is the best. If you want to increase in production, you
must be sure that your company is working very well. There is only one thing
reflect it. It’s company’s revenue. The higher the revenue is, the more successful
project is. So the thing needed to do is examining whether the extra revenue from
selling the additional product is greater or smaller than the extra cost. Both the
productivity of workers and average cost are important but they don’t indicate
the company’s profit.

7.
a. Talk about affection of provision of Social Security, I think there are two
situations. In the first case, provision will reduce incentive of people to save for
retirement. In the other, people still put away to have an additional income, not
depend on money of Government.
b. For recipient of Social Security deciding to work and earn some income, his
benefit is reduced. I think if income he earns from an extra work is higher than
income of Social Security, he still works there. On the contrary, if job’s salary is
not as much as income of Social Security, he will quit the job.

8.
a. If many welfare recipients only receive income from Government within two
years, they have more incentives to looking for a new job after that.
b. To people who is not able to find a job, cutting their benefit after two years is
unequal for them. However, a greater incentive to find a job make economy
works more efficient.

9.
My roommate is a better cook than I am, but I can clean more quickly than my
roommate can. If my roommate did all the cooking and I did all the cleaning, we’ll
use time for chores the most efficiently. Because each is responsibility for what he
does best, he’ll be able to complete his task in the optimal time. On the contrary,
if I divide task into equal part, both I and my roommate must do what we are not
really good at. So it takes more time to finish the tasks. Besides, focusing on one
task makes productivity and efficiency of work higher.
Ex: Viet Nam has a very high rice export in the world. So Viet Nam specializes in
providing rice and coffee to Japan. On the other hand, Japan is excellent at
technology so they provide us the best technological products currently. That is
the trade which makes two countries both better off.

10.
To make decisions about how many compact discs to produce, what artists to
record, and which consumers should receive the discs, I need to know about
musical tastes of everyone, the favorite singer currently, and cost as well as
technology to produce compact discs.

11.
a. Regulating cable TV prices: Efficiency – the cable TV monopoly makes the
market failure.
b. Providing some poor people with vouchers that can be used to buy food:
Equality – help poor to have a better life, reduce disparity between standard of
living of richer and poor.
c. Prohibiting smoking in public places: Efficiency – market failure occur because
there are too many nonsmokers harmed by smokers in public.
d. Breaking up Standard Oil (which once owned 90 percent of all oil refineries)
into several smaller companies
e. Imposing higher personal income tax rates on people with higher incomes:
Equality – the rich will contribute more to help poor to reduce difficult in the life.
f. Instituting laws against driving while intoxicated: Efficiency – there are too
many accidents caused by driver who is in intoxication.

12.
a. “Everyone in society should be guaranteed the best healthcare possible.”
- If the poor would be guaranteed the best healthcare possible, the common
living standard of whole society will increase significantly. On the other hand,
guarantee of the best health services for everyone means the government and
public must spend more on health care. As a result, the economy would be less
efficient.
b. “When workers are laid off, they should be able to collect unemployment
benefits until they find a new job.”
- Providing amount of money for the unemployed makes equality in society.
However, if the unemployed always receive unemployment benefits, they are
encouraged to live without a job. The economy will be adversely affected if
unemployment lasts for a long time. So it’s necessary to make a balance between
equality and efficiency in the economy.

13.
The standard of living is improved considerably after Viet Nam became fully
independent. This is mainly the result of increased productivity, so that an hour of
work produces more goods and services than it used to. The government had
suitable policies to develop the economy, encouraged everyone enrichs for
themselves and for nation.