ECON 101 Lecture Notes - Lecture 1: Human Capital, Paper Towel, Diminishing Returns
ECON 101 Notes
How people make decisions.
• People face tradeoffs.
• The cost of something is what you give up to get it.
• Rational people think at the margin.
• People respond to incentives.
How people interact with each other.
• Trade can make everyone better off.
• Markets are usually a good way to organize economic activity.
• Governments can sometimes improve economic outcomes.
The interactions between the people can affect many components within families
and societies.
• The most common ones that are looked at regularly are livings standards,
which are the condition that humans are living in.
• Inflation rate (consumer price index) determines the rate of the price rise
of goods.
Oftentimes, it is difficult to draw conclusions about the consequences of inflation.
There are a few results of the outcome in terms of income distribution and
economic growth.
• If inflation is anticipated, it will generally not have major impacts on income
distribution.
• If inflation is unanticipated (oftentimes disinflation or accelerating inflation),
then it can have major impacts on income distribution.
• Deflation has been associated with slow or negative economic growth.
• There is controversy over whether a policy of aiming for low inflation is
superior to a policy of tolerating moderate inflation as a means of
supporting economic growth.
• High accelerating inflation can generate political support for a costly
disinflation to get inflation back to control.
• Hyperinflation is associated with low or negative economic growth and has
often lead to economic collapse.
Externalities
An externality refers to the uncompensated impact of one person’s actions on the
well being of a bystander. Externalities cause markets to be inefficient, and thus
fail to maximize total surplus.
For example:
• When the impact on the bystander is adverse, the externality is called a
negative externality.
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• When the impact on the bystander is beneficial, the externality is called a
positive externality.
The intersection of the demand curve and the social-cost curve determines the
optimal output level.
• The socially optimal output level is less than the market equilibrium
quantity.
• Internalizing an externality involves altering incentives so that people take
account of the external effects of their actions.
The intersection of the supply curve and the social-value curve determines the
optimal output level.
When an externality benefits the bystanders, a positive externality exists.
• The social value of the good exceeds the private value.
• The optimal output level is more than the equilibrium quantity.
• The market produces a smaller quantity than is socially desirable.
• The social value of the good exceeds the private value of the good.
The Coase Theorem is a proposition that if private parties can bargain without
cost over the allocation of resources, they can solve the problem of externalities
on their own.
Transactions Costs
• Transaction costs are the costs that parties incur in the process of
agreeing to and following through on a bargain.
Command-and-Control Policies
• Usually take the form of regulations:
• Forbid certain behaviors.
• Require certain behaviors.
Examples:
• Requirements that all students be immunized.
• Stipulations on pollution emission levels set by the Environmental
Protection Agency (EPA).
Public goods and common resources
• When a good does not have a price attached to it, private markets cannot
ensure that the good is produced and consumed in the proper amounts.
• In such cases, government policy can potentially remedy the market
failure that results, and raise economic well being.
• Excludability
o Excludability refers to the property of a good whereby a person can
be prevented from using it.
• Rivalry
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o Rivalry refers to the property of a good whereby one person’s use
diminishes other people’s use.
• Four Types of Goods
o Private Goods
o Public Goods
o Common Resources
o Natural Monopolies
• Private Goods
o Are both excludable and rival.
• Public Goods
o Are neither excludable nor rival.
• Common Resources
o Are rival but not excludable.
• Natural Monopolies
o Are excludable but not rival.
Solving the Free-Rider Problem
o The government can decide to provide the public good if the total
benefits exceed the costs.
o The government can make everyone better off by providing the
public good and paying for it with tax revenue.
Cost Benefit Analysis
• Cost benefit analysis refers to a study that compares the costs and
benefits to society of providing a public good.
• In order to decide whether to provide a public good or not, the total
benefits of all those who use the good must be compared to the costs of
providing and maintaining the public good.
• A cost-benefit analysis would be used to estimate the total costs and
benefits of the project to society as a whole.
• It is difficult to do because of the absence of prices needed to estimate
social benefits and resource costs.
• The value of life, the consumer’s time, and aesthetics are difficult to
assess.
*Besides the cost and benefit analysis that are performed on an individual basis,
the free rider problem still exists without clear indication on who has the right to
complete what tasks on this land.
The market fails to allocate resources efficiently when property rights are not well
established (i.e. some item of value does not have an owner with the legal
authority to control it).
• When the absence of property rights causes a market failure, the
government can potentially solve the problem.
Firm Behaviour
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ECON 101 Full Course Notes
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Document Summary
How people make decisions: people face tradeoffs, the cost of something is what you give up to get it, rational people think at the margin, people respond to incentives. How people interact with each other: trade can make everyone better off, markets are usually a good way to organize economic activity, governments can sometimes improve economic outcomes. The interactions between the people can affect many components within families and societies: the most common ones that are looked at regularly are livings standards, which are the condition that humans are living in. Inflation rate (consumer price index) determines the rate of the price rise of goods. Oftentimes, it is difficult to draw conclusions about the consequences of inflation. There are a few results of the outcome in terms of income distribution and economic growth. If inflation is anticipated, it will generally not have major impacts on income distribution.
