23115 Lecture Notes - Lecture 1: Opportunity Cost, Scientific Method, European Cooperation In Science And Technology
Lecture 1 – Introduction
▪ Economics is the social science that studies how society manages its scarce resources. So it
studies the choices that individuals, firms and government make as they cope with
scarcity (allocation of resources) and the incentives that influence those choices. Scarcity means that
society has limited resources and therefore, cannot produce all the
goods and services people wish to have.
▪ Microeconomics focuses on individual agents in the economy...
❖ How households + firms make decisions and how they interact.
❖ Aims to understand how scarce resources are allocated among alternative uses, the role of
prices & markets and how economic policy can lead to better outcomes for society.
▪ Macroeconomics looks at the economy as a whole...
❖ Fouses o eoo‐ide pheoea like eooi groth, ueploet ad iflatio.
‐ THE TEN LESSONS FROM ECONOMICS (CHAPTER 1)
LESSON 1: PEOPLE FACE TRADE‐OFFS
▪ Because of scarce resources, making decisions requires trading off one goal for another. An
eaple is the trade‐off etee efficiency (getting the largest output from available
resources) and equity (distributing output fairly among members of society to irease oerall ell‐
being in society). I.e. the size of the economic pie and how the pie is divided.
Often, when government policies are being designed, these two goals conflict. The progressive
income tax system (or welfare systems in general) has the benefit of greater equity but reduces
efficiency since there is less incentive/reward for working harder.
LESSON 2: THE COST OF SOMETHING IS WHAT YOU GIVE UP TO GET IT
• ▪ In economics, the cost of something is what you give up to get it, not just in terms of
monetary costs but all opportunity costs.
• ▪ The opportunity cost of an item is the value of what you give up to obtain that item – in
short, the value of the alternative forgone.
LESSON 3: RATIONAL PEOPLE THINK AT THE MARGIN
• ▪ Rational people choose the best option from available alternatives by comparing costs
and benefits at the margin.
For example – Suppose that flig a 200‐seat plae fro Brisae to Perth osts the airlie
$100,000, an average cost of $500 per seat. The plane is minutes from departure, there are
several vacant seats and a person is willing to pay $300 for a seat.
Should the airline sell the seat for $300? Yes – as long as the marginal benefit (the revenue
from an extra seat sold, here $300) exceeds the marginal cost (the cost of providing the seat
to one additional passenger, here close to $0), selling the ticket is profitable.
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Document Summary
Lecture 1 introduction: economics is the social science that studies how society manages its scarce resources. So it studies the choices that individuals, firms and government make as they cope with scarcity (allocation of resources) and the incentives that influence those choices. Scarcity means that society has limited resources and therefore, cannot produce all the goods and services people wish to have: microeconomics focuses on individual agents in the economy How households + firms make decisions and how they interact. Aims to understand how scarce resources are allocated among alternative uses, the role of prices & markets and how economic policy can lead to better outcomes for society: macroeconomics looks at the economy as a whole Fo(cid:272)uses o(cid:374) e(cid:272)o(cid:374)o(cid:373)(cid:455) (cid:449)ide phe(cid:374)o(cid:373)e(cid:374)a like e(cid:272)o(cid:374)o(cid:373)i(cid:272) gro(cid:449)th, u(cid:374)e(cid:373)plo(cid:455)(cid:373)e(cid:374)t a(cid:374)d i(cid:374)flatio(cid:374). The ten lessons from economics (chapter 1) Lesson 1: people face trade offs: because of scarce resources, making decisions requires trading off one goal for another.
