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Thinking Like an Economist Lecture 1 Manove.docx

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Boston University
CAS EC 101
Michael Manove

Thinking Like an Economist Lecture 1 Manove 1. Think about the goods (not the money) Ex: Black Monday (Oct 19, 1987)  U.S. stock market lost 22.6% of its value.  $500 billion seemed to disappear.  Where did it go?  Did society become $500 billion poorer because of the stock- market crash?  Let’s look at the goods:  Did factories disappear on Black Monday? o No  Did the CEO’s desk vanish from under his nose? o No  The material wealth of society did not change.  But investors revised their beliefs about its value— downwards.  This is bad for sellers of assets (like houses).  …but it may be good for buyers of assets, who can now get them for cheap.  Effects on the production of goods and services??? 2. Everything has a cost.  The cost of something is what you give up to get it.  Economists call this the “opportunity cost.”  Ex: The cost of an A on an econ exam? o An evening of fun with your friends… o …because you have to study instead  Ex: The cost of having kids? o The freedom to do what you want when you want (among other things) Opportunity Cost  What is the difference between the cost of something and its “opportunity cost”? o Answer: there is no difference.  The opportunity cost embodies the economic concept of cost.  The cost is the opportunity that has to be sacrificed in order to get something or do something.  Ex: Do you want to buy an Alpha Romeo? o Then you can’t afford a vacation in Italy. o (The vacation is the opportunity cost of the car.)  Ex: Do you want to get an A in Economics? o Then you cannot socialize with your friends every night. o (Socializing with friends is an opportunity cost of the A.) 3. Rational Choices involve comparing costs and benefits.  Time and resources are scarce (insufficient to satisfy all
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