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ECON 103 Chapter 1

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ECON 103

Tobey Chen ECON 103 2011 Spring Chapter 1 Introduction What is economics? Economy= A system for coordinating the productive activities of many people. (Economy is the study of the allocation of scarce resources.) Macroeconomics vs. Microeconomics Microeconomics examines the behavior of individual economic entities: firms and consumers. Macroeconomics is the study of the economy as a whole. Market Economy = People make decisions about production and consumption -Has profits and incentives, has better quality goods, has more goods, has economy freedom, is more efficient produce at the lowest price. Eg. USA Command Economy = Governments make decisions about production and consumption. -More equal distribution of goods (Equity), more stable economy, job stable- less creative destruction. Eg. North Korea, Cuba Chapter 1: First Principles Principles of Individual Choice 1. Resources are scarce Resource = anything that can be used to produce something else. Economy Resource: 1. Land 2. Labour 3. Capital 4. Human capital Scarcity = resources are scarce when there isn’t enough to satisfy all productive uses if it were free. (The quantity of available is not large enough to satisfy all productive uses). • Income –even the richest person in the world couldn’t buy everything in the world • Time- limits the amount we can consume or work 1 Tobey Chen ECON 103 2011 Spring 2. The real cost of something is what you must give up to get it. Monetary cost = Nominal Cost: how much you pay in money. Opportunity cost = Real cost: What you have to give up to get it. Opportunity cost (O.C) = cost of time + monetary cost *You will only skip university if you know you could earn a lot doing something else e.g. Actors, athletes 3. People make decisions at the margin Decide “How much or How many” but not “Yes or No” Marginal decision is an incremental decision. Decide about whether to do a bit more or a bit less of an activity. People make marginal decisions and because resources are scarce we must make tradeoffs. • Marginal analysis is the study of marginal decisions 4. People usually exploit opportunities to make themselves better off. • If the same product is sold cheaper at one store, you’ll shop there. • If getting a degree in Business will get you a higher income than a degree in English, you’ll get a degree in Business. • If gas prices double, more people will buy smaller cars. People respond to “Incentives”. Incentives: Anything that offers rewards to someone who changes their behavior. Negative Incentives Positive Incentives *People weigh the costs and benefits of purchases/activities in order to make decisions 2 Tobey Chen ECON 103 2011 Spring Principles of Interaction Interaction of choices: my choices affects you choices, and vice versa- is a feature of most economic situations. The results of this interaction are often
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