Economics A100 Lecture Notes - Lecture 11: Marginal Cost, Market Power, Market Failure
Document Summary
Decisions require comparing the costs and benefits of alternative choices. Opportunity cost- whatever must be given up (3) rational people think at the margin. Rational people- systematically and purposefully do the best they can to achieve their objectives, given the available opportunities. Marginal changes- incremental adjustments to an existing plan. Ex: going to college for another year: compare the fees and foregone wages. The rational decision maker takes an action if and only if the marginal benefit of the to the extra income you could gain with the extra education action exceeds the marginal cost (4) people respond to incentives. Incentive- something that induces a person to act. Incentives alter behavior (ex: if gas prices rise, people buy smaller cars and less. Policymakers must never forget about incentives; many policies change the cost or benefits that people face and therefore alter behavior (6) markets are usually a good way to organize economic activity.