Arcilla, Willy Grace U.

BSA5
Assignment in Macroeconomics:

10 Principles of Economics by N. Gregory Mankiw

HOW PEOPLE MAKE DECISIONS:
1.
2.
3.
4.

People Face Tradeoffs.

The Cost of Something is What You Give Up to Get It.
Rational People think at the Margin.
People respond to incentives.

HOW THE ECONOMY WORKS AS A WHOLE:

5. Trade can make everyone better off.
6. Markets are usually a good way to organize.
7. Governments can sometimes improve market outcomes.

HOW PEOPLE INTERACT:

8. A countrys standard of living depends on its ability to produce goods and
services.
9. Prices rise when the government prints too much money.
10. Society faces a short-run tradeoff between inflation and unemployment.

From those ten principle of economics mentioned above I picked 3 principles that I will
explain and relate it to my specialization as an accountancy student;
People face tradeoffs this principle of economic talks about how we, people
make decisions and for every decision involves a trading off one goal against another.
Even in our daily activities, we are face with many different decision like what clothes to
wear, or even the decision to go to school or just stay home and rest. All of these
scenarios requires us to trading off one goal against the other. And in accounting we are
taught how to help management and the company in making decisions that will affect
the entire firm, to be specific it is under the course of managerial accounting or
management services. One of the things we have to prepare is the variance analysis, it
is where we analysis if we reach the budgeted expense for production or we exceeded
it. And to provide more detailed illustration, I will use the material price variance and
material quantity variance, in a material price variance we analyze if the price of raw
materials purchase is equal or did exceed the budgeted price of raw materials that was
set by the company. And if the actual price exceeds the budgeted price it will result in
unfavorable material price variance but this will not be enough to make a decision to
change supplier that is why we prepare the material quantity variance. In material
quantity variance we compare the actual number of raw materials used against the
budgeted raw material set by the company if for example results in a favorable material
quantity variance, meaning we are used less raw materials than what the company
budgeted. This helps the management in their decision making whether to change
supplier or not and in relation to the illustration the management decides to maintain
supplier. Why? Although the price of the raw materials is more expensive that what is
budgeted, we are able to lessen the number of raw materials used maybe this materials
is of higher quality that is why there is a lesser number of rejected materials or spoiled
materials. So this example shows us how a company are face with a decisions and we
accountants help them in making the right or the best decision there is.
The next principle is, The cost of something is what you give up to get it. We all
know that when we chose one decision against another there are some cost attached to
that decision given up and this is what we called opportunity cost. In accounting
opportunity cost is considered very important and relevant in making a decision, to give
a specific illustration, it is called the make or buy decisions. In here we help the
company to decide whether we continue to make the product that will be used in the
production of our main product or just purchase it to outside supplier. In our managerial
report related to this situation we analyze every cost related to it, when the company
decides to make we sum up all the cost that will be incurred like Direct Materials, Direct
labor, Variable Overhead and the opportunity cost. In this case if the company will just
buy the products to outside supplier then we can lease the property used in production
and earn an annual rent income, so this opportunity cost will have to be considered as
an additional cost that the company will have if they continue to make the product. And
the cost that will be incurred when the company decides to buy it to outside supplier will
be of course the price per unit of the material add all cost that the company will continue

to incur even when the company stops it production like unavoidable fixed cost
(property tax). And after classifying, analyzing all the relevant cost we sum it up and
present it to the management and they will go with the decision in where the company
will save more and incur less expense.
Rational people think at the margin this economic principle talks about how
rational decision maker takes action if and only if the marginal benefit of that particular
decision exceeds its marginal cost. Another scenario that every companies face is
whether to purchase an equipment and we analyze all the necessary data for that
equipment, first relevant data that we have to take into consideration will be purchase
price of the equipment and next will be what benefits that it will cause the company, for
example this specific equipment will help the workers to lessen their labor hours and
produce more finished products. We compute the savings that the company will have in
the long run, we get the labor hours to be saved multiply by the labor rate that will give
us the savings per day. And if the equipment has a useful life of 5 years we multiply is
by 264(without weekends) that is equal to 1,320 days multiply by the savings per day
that will be the total savings that we will take into consideration. And for the increase
income, we compute the increase in number of units produce times the selling price of
each unit that will be the estimated increase in income. And all of these relevant cost will
be presented to the management. Another illustration is what we called to sell or
process further in this scenario we analyze what decision will give the company a
higher income. If we decide to sell it then we compute the actual revenue that it will give
the company against the revenue that will result if we process it further. But if we decide
to process it further we have to deduct in its revenue the additional cost that we will
incur upon processing and it will show the net revenue. This net revenue will be
compare against the revenue that it will incur if we just sell it immediately and of course
the company will choose the option that has the highest marginal benefit/revenue. All of
these illustrations shows that a company will always chose an option against another
option If and only if that option has a marginal benefit that exceeds its marginal cost.
I chose this 3 principles under how people make decisions because it is related
to my specialization and did my best to come up with illustrations that is connected with
each of them. But it is not only inside the company that we make choices, like I said
every day we make choices and as a rational person we chose the option that will give
us more benefit that the cost that we will incur. And it is just a matter of analyzing all the
necessary information that is related to every decision we make, So make the right
decisions or just chose the best decisions.