Collectively answer the following questions based on the reading from Chapter One in your text. Due by Wednesday.

Take the online quiz after at http://www.swlearning.com/economics/mankiw/mankiw3e/mankiw3e.html and send me the results.

Principal One: What is a trade-off?
Trade-off is about making choices, giving up one thing for another as nothing comes free. An example is the trade-off between a clean environment and a high level of income. In order to reduce pollution, the cost of production has to increase and because of a higher cost, the profit earning is lower, same goes to the wages, while the the price of the product shoots up.

Principal Two: What is an opportunity cost?
An opportunity cost is what you give up in order to get something. All decisions that you make have opportunity costs, whether they be related to economics or not: if you choose to take one road, the other road would be your opportunity cost. For example, the people who choose to go to college and study there for years face a major opportunity cost: this does not necessarily refer to the money spent on tuition and boarding, but the time spent. A college student could be working at a job and earning wages instead of writing papers and reading text books. Before making decisions one must decide wisely whether the benefit is worth the cost.

Principal Three: Marginal benefits vs. Marginal Costs
Marginal changes are defined as adjustments made to an already decided on action-- making it different fromtrade-offs. Theonly thing that can still be adjusted within this decision are the marginal changes. In order to be able to make these decisions, marginal benefits and marginal costs must be evaluated. The possible outcomes of a decision are analyzed by seeing if the marginal benefits outweigh the marginal costs. The term marginal is used, seeing as the benefits and costs are seen from an outside perspective. If the outcome of a decision has more disadvantages, then the marginal cost is higher, and if the outcome will have more benefits, then the marginal benefits are higher.

Example: A company procuces 10 shirts, and the total cost is $50. If they decide to increase production to 11 shirts, the total cost is $60. Themarginal cost is then $10, because it is measuring the change in cost over the change in quantity.

Principal Four: How are incentives important?
Incentives are important because they alter people's behavior. Policymakers have the power to create incentive in people and therefore cause people to do things.

Example:taxing gasoline will make people drive smaller fuel-efficient cars because people choose things that are more beneficial for them.
Example: the seat belt law. Driving slowly and carefully costs the driver time and energy, so people tend to drive more carefully when the benefits of careful driving are higher (ex. icy roads). Seat belts are well known to reduce the costs of the accident, which therefore causes a decrease in the benefits of careful driving. With seat belts, because of the feeling of security, drivers feel less incentive to drive slow and carefully. Thus the seat belt law causes fewer death per accident, but causes more accidents. This all depends on people's incentives in their actions and what they choose to do depending on these incentives.

Principal Five: Why is trade good?
Trade can make everyone better off; it allows everyone to specialize in what they do best. By trading, people can buy more G&S at lower cost. This also happens with countries. Trade can make everyone better off because it isn't like if one looses the other one wins, by trading both obtain profit.
Free trade allows countries to specialize in their strongest market, and by trading with other countries they are able to compliment each other with the different goods and services that they are each dominant in. This way, they can recieve a greater variety of goods and services while focusing on the efficient production of their specialized goods, and gaining a profit from it.

Example: Argentina trades with China, where Argentina exports meat and imports electronics. Argentina will make a higher profit by specializing in meat rather than developing an electronics industry.


Principal Six: What is a market economy?
A market economy is basically a economic system in which the government makes no intervention what so ever. This allows flowing of prices and choices for both the producer and the consumer. In a market economy, Prices are set based upon the principles of supply and demand.
* Note: There is no country with an absolute market economy. All governments intervene to some extent.
Market Power: A person can influence the market prices

example: Adam Smith's "invisible hand", free market society without government intervention

Principal Seven: What and how can markets make things better?
Markets increase the range of goods and services offered in an economy. The more choices between products, the high the competition between companies. As producers compete for consumers, they look for ways in which they can overcome the competition, which can be achieved by improving their items.