Economic First Principles
2. Efficiency means that society is getting the maximum benefits from its scarce resources while equality refers to those benefits are distributed uniformly among societys members (Mankiw 5).When government tries to redistribute income from rich to poor, equality within society increases while efficiency falls (Mankiw 5). By allocating some portion of rich mens income to the poor, government reduces the discrepancy between income earned by poor and rich households and average household income, thereby achieving greater equality in income distribution. However, by allocating rich peoples hard earned money to poor unemployed people, government discourages them from producing goods and services at optimum levels, reducing efficiency (Mankiw 5). Mankiws decision is correct as long as governments intervention of income redistribution interferes with a market producing efficiently and negative outcomes are indicated as per marginal analysis, i.e. costs outweigh benefits. However, in case of market failures (Mankiw 11) and when marginal analysis indicates that benefits outweigh decision costs, for instance when majority of rich are withdrawing money from circular flow of income and hindering production at optimum levels or when rich find a way to exploit poor people by lowering wages or through lay-offs to make up for taxes imposed on the rich and that discrepancy in rich and poor household income increases instead of declining, then Mankiws decision will be wrong and both equality and efficiency will both increase or decrease.
3. Opportunity cost of a decision is the value of the good or service forgone (Nordhaus 13) or given up for the same (Krugman 7 Mankiw 5). The opportunity cost of attending AIU was the knowledge, experience and fun I would have derived from Undergraduate Economics Degree at the University of British Columbia, or the University of Victoria. In case I was not selected for any of the aforementioned universities, opportunity cost of attending AIU would be the income and experience I could have gained from a job. The opportunity cost of coming to class last Wednesday was the enjoyment of watching Avatar, a film, at the movie theatre with my school friends.
4. An incentive is anything that induces or motivates a person to act such prospects of reward and punishment (Krugman 10 Mankiw 7). Extension of AIU terms from 10 to 15 weeks will provide certain incentives to students, either in the form of higher or lower motivation for study and leisure. Studious people, who are burdened by paucity and insufficiency of time for obtaining mastery of course materials, may be encouraged to dig deeper into taught concepts and enhance their overall understanding and mastery of the subjects. Similarly, students may be motivated to submit top notch assignments and projects which were earlier not feasible due to tight time constraints. Conversely, students may also be encouraged to postpone studies and assignments, and put in lesser hours of work each day, because of extended time schedule. Some may be motivated to use the spare time to indulge in leisure activities like eating out and movies. Still others may seek part time jobs or extend their work hours to earn some money along with study. These are the possible outcomes that may ensue if the term period at AIU is increased from 10 to 15 weeks.
5. Government intervention in a market economy can improve economys performance when the market is not producing efficiently (Krugman 16) and suffering from market failures like externalities and market power (Mankiw 11) that result due to side effects of individual actions, when some one or more parties try to capture a greater share of resources discouraging mutually beneficial trade and when the very nature of certain goods promotes inefficiency (Krugman 16). In such cases, Mankiws hypothesis that increasing equality through re-distribution of income from rich to poor lowers efficiency (Mankiw 5) may stand negated.