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CH 1 The Economic Approach Lecture Notes

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Florida State University
ECO 2023
Joab Corey

Chapter1TheEconomicApproach economics: the study of how we make choices under scarcity 1. choice: the act of selecting among alternatives 2. scarcity: the concept that there is less of a good freely available ex: time, money, cars, etc, SCARCITY • not the same as poverty; the definition of poverty is always changing • necessitates rationing (allocating scarce goods to those who want them) • in a market economy price is used to ration goods and services • leads to competitive behavior RESOURCES 1. Human resources or human capital 2. Physical resources or physical capital - man made items used to produce something else 3. natural resources capital: human made resources used to produce other goods and services EconomicWayofThinking 1) Resources are scarce so decision makers must make trade-offs (there is no such thing as free lunch!) opportunity cost: the highest value alternative that must be sacrificed when choosing an option ex] hour of time; how you spend your next $5 2) Individuals are rational: they try to get the mot from their limited resources "greatest benefit at least possible cost." note: what is rational for one person may not be rational for everyone. 3) Incentives matter: choice is influenced in a predictable way by changing incentives. benefits GO UP more people do it costs GO UP nobody does it ex] the money game, prices 4) Individuals make decisions at the margin. marginal: the effect of a change in a given situation ex] Going on a trip to Miami? Will you drive or fly? Drive 8 hours: $100 Fly 2 hours: $400 Marginal benefit = what you will gain as a result of the change = 6 hours of time Marginal cost = what you will lose a result of the change = $300 ex] Super sizing your extra value meal at McDonald's MB = more food MC = more money and more fat content in the food cost-benefit analysis: we make actions when the (marginal) benefits out
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