ECON 102 Lecture Notes - Lecture 1: Opportunity Cost, Market Power, Market Failure
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Econ 101
Principles of Microeconomics
Fall 2019
● Introduction
○ Fundamental Economic Problem: resources are scarce
○ DEF: scarcity – limited nature of society’s resources
○ DEF: economics – study of how society manages its scarce resources
● How people make decisions
○ Principle #1: People face trade-offs
■ An important trade-off that society faces is the trade-off between efficiency and
equality
● DEF: efficiency – the property of society getting the most it can from its scarce
resources
● DEF: equality – the property of distributing economic prosperity uniformly
among members of society
○ Principle #2: The cost of something is what you give up to get it
■ Making decisions requires individuals to consider the benefits and costs of some
actions
● DEF: opportunity cost – whatever must be given up in order to obtain some item
○ Principle #3: Rational people think at the margin
■ Economists generally assume people are rational
● DEF: rational person – a person who systematically and purposefully do the best
they can to achieve their objectives
■ Many decisions in life involve incremental decisions
ex. Should I remain in school this semester? Should I study an additional hour for the
exam tomorrow? Yes and Yes
● DEF: marginal change – a small incremental adjustment to a plan of action
■ Rational decision-makers take action if and only if marginal benefits exceeds
marginal costs
○ Principle #4: People respond to incentives
■ DEF: incentive – something that induces a person to act
■ Rational people weigh the benefits and costs of an action which can be altered by an
incentive
● When tax rates rise, individuals have less incentive to work more
● How people interact
○ Principle #5: Trade can make everyone better off
■ Trade is not like sports contests where one side gains and the other side loses
■ Trade allows for specialization in products that countries (or families) can do best
○ Principle #6: Markets are usually a good way to organize economic activity
■ DEF: market economy – an economy that allocates resources through decentralized
decisions of many firms and households as they interact in markets for goods and
services
Document Summary
Def: scarcity limited nature of society"s resources. Def: economics study of how society manages its scarce resources. An important trade-off that society faces is the trade-off between efficiency and equality. Def: efficiency the property of society getting the most it can from its scarce resources. Def: equality the property of distributing economic prosperity uniformly among members of society. Principle #2: the cost of something is what you give up to get it. Making decisions requires individuals to consider the benefits and costs of some actions. Def: opportunity cost whatever must be given up in order to obtain some item. Principle #3: rational people think at the margin. Def: rational person a person who systematically and purposefully do the best they can to achieve their objectives. Many decisions in life involve incremental decisions ex. Def: marginal change a small incremental adjustment to a plan of action. Rational decision-makers take action if and only if marginal benefits exceeds marginal costs.