ECON-2110 Lecture Notes - Lecture 3: Economic Model, Vehicle Insurance

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15 Dec 2015
ECON 2110: Intro to Microeconomics August 26
Topic 1: The Economic Way of Thinking (cont.)
The Economic model is not a realistic description of human behavior!
Especially for smaller actions
As stakes rise, economic model becomes more accurate
example- buying a house
BUT models are never realistic
Who cares if it is realistic, is it useful?? (Ability to predict)
[ The assumption that people decide by comparing MB&MC appears to be pretty useful for
prediction ]
Empirical question: pushes in both directions
Econ model employed in social science:
Political science
Legal scholarship
The economic model is [ positive ] rather than normative
Positive: consequences of action - prediction
Normative: expresses value - good / bad - often opinion
(Advocates hate to hear about trade-offs, they just want the normative)
Topic 2: Essential Concepts
1. Marginal Analysis
Sleep or studying? Pick one --- but both are important
One more hour of studying or one more hour of sleep? At the margin (lil o this)
Marginal: additional costs / benefits
economic questions involve marginal amounts
Marginal costs of attending USC game?
Gas to drive? - yes
Car insurance? - no
Wear & tear of tires? - Yes
Studying that day? - Yes, if you were gonna study during
^^^^ Benefit (enjoyment) vs costs you would not face otherwise
Every decision involves both benefits and costs at the margin!
Marginal Principle:
MB > / = MC -------- do it!
MB < MC ------------ don’t!
Change in total benefits “per unit” (per action)
^ ^ ^ diminishing marginal benefits
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