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Chapter 1, Problem 1BCQ



5th Edition
Paul Krugman + 1 other
ISBN: 9781319066604




5th Edition
Paul Krugman + 1 other
ISBN: 9781319066604
To determine


How the 12 principles of economics work


There are generally twelve principles of economics. The explanation given below relates those principles to the given case.

  • First: P Company fulfills the needs of consumers who are willing to make a choice between quality and convenience to acquire lower prices.
  • Second: The real cost of vacant airline seat or vacant hotel room is the income that they would have received from its use in the next best alternative.
  • Third: The amount paid for tickets depends on how much inconvenience and time is saved by buying it for higher prices. Similarly, the amount paid for advance ticket depends on the variation in price and cancellation policy.
  • Fourth: P Company is popular as people exploit the opportunities of getting hotels, flights, and many other benefits at lower cost.
  • Fifth: In Europe, gains from P Company network are more because it involves trade of goods and services provided to the people.
  • Sixth: O Company and E Company provided many incentives to the travelers to use their services. Hence, market of online services will move towards equilibrium.
  • Seventh: P Company used the resources like hotel rooms and airline seats in a very efficient manner. It is not wise to keep vacant seats and room, if someone wants them at going price.
  • Eighth: Vacant seats and room lead to inefficiency. So, P Company made its product popular and familiar through online services.
  • Ninth: A brief slump in the airline industry was managed by the government, as government intervention helped the industry by avoiding loss of jobs of many supporting staffs and company failure.
  • Tenth: Due to the attack of September 2001, people stopped spending on airline tickets. As a result, the salary of airline workers reduced.
  • Eleventh: The whole economy was suffering from depression after the attack of 2001 because the production was greater than the spending in the economy.
  • Twelfth: Congress provided aid of $15 billion to stabilize the airline industry and prevented major recession in the industry.

Concept Introduction:

Twelve principles of economics are:

  • Resources are scarce, so people must make choices.
  • The true cost of anything is the next best alternative foregone, which is termed as opportunity cost.
  • Marginal decision and incentive are very important.
  • People respond to incentives by exploiting available opportunities to make themselves better off.
  • Trade benefits to everyone.
  • Market moves towards equilibrium.
  • Resources should be used efficiently to achieve social goals.
  • Market leads to efficiency.
  • When the market fails, government intervenes to maintain equilibrium.
  • Spending of one person becomes income of another.
  • Sometimes, spending varies with the economy’s productive capacity.
  • Government policies can change spending.

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