Part 1
1. The opportunity cost principle stems from the fact that resources are scarce, effectively necessitating tradeoffs between different alternatives, and it represents the value of the next best alternative that is foregone. Pursuing one’s post graduate studies in lieu of a taking up a job, makes the potential earnings and benefits of the foregone job, coupled with the cost of education, the opportunity cost of postgraduate studies.
2. The Marginal principle is used to in the assessment of the efficiency, satisfaction and cost etc, by the value of an increase in the total value resulting from one additional unit. The utility derived from the consumption of one more coke, is the marginal utility of consumption of the product.
3. Voluntary Exchange Principle describes the willingness of both buyers and suppliers in the market to freely make transactions. Exchanging a Rolls Royce Phantom for a bar of chocolate represents this, provided the parties are willing, an it would lead in efficiency since the utility of both parties would be met.
4. Refers to the reduction in diminishing returns describes the decline in the marginal output with the increase in one factor of production, keeping others constant. Increasing the number of laborers in a one-acre orange farm will increase the number of oragnges picked per hour per worker if every worker earns $20 per day, but if the number of laborers are raised to 100,000 the labor cost would result in reduced number of oranges picked per employee compared to the costs.
5. The price of a car at current market prices represents its nominal value, but the price of the car in terms of the amount of television sets that it can be exchanged for, is the real value or price of the car.
Part 2
The equilibrium point ensures that there is no excessive supply on the market, and the needs of the market are exactly met, effectively helping the market to clear. At this point, the market is stable, effectively allowing suppliers and buyers to plan their purchases. The reduction in wastages results in increased efficiency of the market that in turn results in increased utility for all economic agents. In addition, the market clearance ensures that firms that do not produce at the prevailing market prices improve their production methods lest they will suffer losses in sales forcing them to reduce their respective quantities and possibility go out of business.
Individual companies benefit from the stability in the market ensured by market equilibrium, which allows them to accurately plan the quantity to produce and the revenues that would be attained in the market. Besides production planning, firms can better their production methods to match their competition, effectively resulting in increased production technologies. The increase in the equilibrium prices implies there is a shortage in the market, hence the company can increase its quantity supplied to the market, which would increase the sales and revenues realized by the firm. A fall in the equilibrium prices indicates there is too much quantity supplied in the market, effectively, the company must cut back on its production, lest it suffers a decline in revenues and profit margins.
References
Eicher, T. S., Mutti, J., & Turnovsky, M. (2009). International Economics. London: Taylor & Francis.
Smith, S. J., & Searle, B. (2007). The Blackwell Companion to the Economics of Housing: The Housing Wealth of Nations. London: John Wiley & Sons.
