EC120 Lecture Notes - Lecture 1: Progressive Tax, Opportunity Cost, Marginal Cost
EC120 ā Chapter 1: Ten Principles of Economics
- What is Economics all about?
1. āīaīīitī: The liī
µited ī
¶atuīe of soīietīās īesouīīes.
2. Economics: The study of how society manages its scarce resources. It includes how people
decide what to buy and how much work, save and spend. It is about how firms decide like
how much to produce and how workers to hire. It is also about how society decides such as
how to allocate (divide) resources between competing interests (national defence,
consumer goods, protecting the environment, and other needs).
- Microeconomics: A branch of economics to study the behavior of consumers and producers.
- Microeconomic Tools: Vocabulary, graphical analysis and relying heavily on math.
THE PRINCIPLES OF HOW PEOPLE MAKE DECISIONS:
- Principle 1: People Faces Tradeoffs:
1. īTheīe is ī
¶o suīh thiī
¶g as a fīee luī
¶īhī ā Milton Friedman
2. All decisions involve tradeoffs:
ā¢ Labour/Leisure tradeoff: Working longer hours (results in more money) leaves less time
for leisure (spending money).
ā¢ Study/Party tradeoff: Going to a party the night before midterm leaves less time for
studying.
3. Society faces an important tradeoff: Efficiency vs. Equity
ā¢ Efficiency: When society gets the most from its scarce resources.
ā¢ Eīuitī: Wheī
¶ pīospeīitī is distīiīuted ī
µoīe īfaiīlīī aī
µoī
¶g soīietīās ī
µeī
µīeīs.
4. Hypothetical Tradeoff: To achieve greater equity, we could redistribute income from
wealthy to poor.
ā¢ Redistribution generally accomplished through a progressive tax system and social
programs.
ā¢ Earned income provides and incentive to work. (Tax reduce the incentive to work)
ā¢ Woīkiī
¶g less ī¾loīeī pīoduītiīitīīæ shīiī
¶ks the size of the eīoī
¶oī
µiī īpieī.
- Principle 2: The Cost of Something Is What You give Up to Get It:
1. Making decisions requires comparing the costs and benefits of alternative choices.
ā¢ Opportunity cost: of any item is whatever must be given up to obtain it.
ā¢ The cost of using a resource for one purpose is the benefits forgone from the highest-
valued alternative use.
ā¢ Opportunity cost is the relevant cost for decision making.
2. Examples of opportunity cost:
ā¢ Going to college for a year is the forgone wages.
ā¢ Allocating another dollar of government budgets to health care is one less dollar to
allocate to another program.
ā¢ Going to a movie is the value of the time you spend in the cinema.
3. Rational People:
ā¢ Systematically and purposefully do the best they can to achieve their objectives, given
their constraints.
ā¢ Make decisions by evaluating costs and benefits of marginal changes.
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Ec120 chapter 1: ten principles of economics. What is economics all about: (cid:272)a(cid:396)(cid:272)it(cid:455): the li(cid:373)ited (cid:374)atu(cid:396)e of so(cid:272)iet(cid:455)"s (cid:396)esou(cid:396)(cid:272)es, economics: the study of how society manages its scarce resources. It includes how people decide what to buy and how much work, save and spend. It is about how firms decide like how much to produce and how workers to hire. It is also about how society decides such as how to allocate (divide) resources between competing interests (national defence, consumer goods, protecting the environment, and other needs). Microeconomics: a branch of economics to study the behavior of consumers and producers. Microeconomic tools: vocabulary, graphical analysis and relying heavily on math. Principle 1: people faces tradeoffs: (cid:862)the(cid:396)e is (cid:374)o su(cid:272)h thi(cid:374)g as a f(cid:396)ee lu(cid:374)(cid:272)h(cid:863) milton friedman, all decisions involve tradeoffs: Incentive: something to induce a person to act such as a reward or punishment. Rational people responds to incentives (because they weight costs and benefits): examples of marginal changes: