ECO 2023 Lecture Notes - Lecture 1: Constrained Optimization, Opportunity Cost, Budget Constraint

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Published on 26 Sep 2016
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Chapter 1: The Principles and
Practice of Economics
Economic Agents – individuals or groups that make economic choices
oIn Microeconomics we only look at individuals (individual businesses or households)
Scarce Resources – things that people want, where the quantity that people want exceeds
the quantity available
oTime and money are scarce resources
oScarcity – the situation of having unlimited wants in a world of limited resources
Optimization
Optimization is trying to choose the best feasible option, given the available information.
Constrained optimization is making the best option given constraints.
An economic agent faces a trade-off when the agent needs to give up one thing to get
something else. Trade-offs are often explained using budget constraints.
A budget constraint shows the amount of goods or services that a consumer can choose
given their limited budget.
Opportunity cost is the best-alternative use of a resource.
oA monetary value will often be assigned to an opportunity cost in order to
evaluate it easier.
oFor example, the hours you spend at work are assigned the value of your wage
made there.
Cost-benefit analysis is a calculation that adds up costs and benefits using a common
unit of measurement, like dollars.
oCost-benefit analysis is used to find the alternative with the greatest net-benefit
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Equilibrium
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