Tobey Chen ECON 103 2011 Spring
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.
Command Economy = Governments make decisions about production and consumption.
-More equal distribution of goods (Equity), more stable economy, job stable- less
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.
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
• Income –even the richest person in the world couldn’t buy everything in the world
• Time- limits the amount we can consume or work
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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
• 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.
*People weigh the costs and benefits of purchases/activities in order to make decisions
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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