Answer to Question #101197 in Economics of Enterprise for dilpreet

Question

The purpose of economics is to provide a way to think. Economic thinking and decision-making recognize that because of scarcity something cannot be obtained without giving up something else. Consequently, we must make our decisions by comparing the costs and benefits and evaluating the tradeoffs. In doing so, five principles of economic thought come into play: tradeoffs, incentives, opportunity costs, marginal thinking, and voluntary exchange. Explain with a specific example of each how you apply these five principles of economic thought in your everyday life

Answer 1

1. Trade-offs

This arises whenever a consumer has to choose between two things (Mansfield & Yohe, 2017). Resources such as time and money are limited thus people are forced to make choices and thus sacrifice on thing to get another.

For example, if I have 50$ on a weekend and am supposed to choose between a meal of 50$ or a shoe worth 50$, I must think and choose one product since the cash at hand is not enough for both items.

2. Incentives

Incentives are very important in everyday life. They act as motivations for individuals to work harder or exercise more or even eat healthier all depending with the type of incentive (Mansfield & Yohe, 2017).

For example, I work in a company whereby we are paid on the basis of basic pay and a commission once we achieve beyond the set target. I will be motivated to work harder every day to increase the commissions I get at the end of the month. This is the incentive I get for working harder beyond the set targets at work.

3. Opportunity cost

In the world of economics, opportunity cost arises since there is trade-off between at least two alternatives. It is the cost of giving up something to get another option. This is the case since resources are limited (Mansfield & Yohe, 2017).

For example, if I go the market and I want to purchase two products with different prices, then I must know what units to purchase for every product. To balance off, I will choose less units of one product and more of the other. This explains the opportunity cost of my decision

4. Marginal thinking

This is the decision that arises whenever an individual wants to consume an extra unit of a given product (Mansfield & Yohe, 2017). Utility is used to measure the satisfaction derived from consuming the product. For every unit consumed, marginal utility is achieved.

For example, last weekend I visited a baking café that was making full cream pastry-cake. After eating the first piece of the cake, I decide to have another to enjoy the sweetness. The extra piece of the full cream pastry-cake gave me a marginal utility.

5. Voluntary exchange

This principle allows buyers and sellers to exchange goods and services in the marketplace (Mansfield & Yohe, 2017). After the exchange, both parties are satisfied with it since there is mutual consent and they do it willingly depending with their personal goals in the trade.

For example, I sell a cold-drink kiosk every lunch time at my area of residence. The customers are thirst for a cold drink. They give me money which am in need of in the business and I offer them the cold drinks to quench their thirst. This is a voluntary exchange since we both get what we want in the end.

Reference

Mansfield, E., & Yohe, G. W. (2017). Microeconomics: Theory, applications. New York, NY: W.W. Norton.