EC 110 Lecture Notes - Lecture 1: Opportunity Cost, Externality, Invisible Hand

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“arit: the liited ature of soiet’s resoures
Economics: The study of how society manages its scare resources
PRINCIPLE #1 People Face Tradeoffs
All decisions involve tradeoffs
Ex:
Going to a party the night before your midterm leaves less time for
studying
Having more money to buy stuff requires working longer hours,
which leaves less time for leisure
Protecting the environment requires resources that could otherwise
be used to produce consumer goods
Society Faces an important tradeoff: Efficiency vs. equality
Efficiency: when society gets the most from its scarce resources
Equality: Whe prosperit is distriuted uiforl aog soiet’s
members
Tradeoff: To achieve greater equality, could redistribute income from
wealthy to poor. But this reduces incentive to work and produce,
shriks the size of the eooi pie
PRINCIPLE #2 The Cost of Something Is What You Give Up to Get It
Making decisions requires comparing the costs and benefits of
alternative choices
The opportunity cost of any item is whatever must be given to obtain
it
It is the relevant cost for decision making
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