Lec 1: ch1 & ch2
What is this course about?
“Economics is the social science that studies the choices that individuals, business,
governments, and entire societies make as they cope with scarcity and the incentives that
influence and reconcile those choices. “ (p 2)
“How do choices end up determining what, how, and for whom goods and services are
produced?” (p 3)
maximize net benefit - the difference between total benefits and total costs -
Principle #1: All decisions involve tradeoffs
Principle #2: The Cost of Something Is What You Give Up to Get It
Principle #3: Rational Decision-Making Means to Think at the Margin
- we will get back to the idea over and over again. Marginal changes are small incremental changes to a plan of action.
Individuals and firms can make better decisions by thinking at the margin. A rational
decision maker continues to take an action if and only if the marginal benefit of the action is
at least as large as the marginal cost.
MB: beneﬁt gained for selling one more ton of steel
MC: extra input used for producing one more ton of steel rational decision choose at the intersection.
• <100,MB > MC-rational maker will go forward because MB is a lot greater than MC
• =100,MB = MC-just right
• the last ounce of steel's mb equals to mc = marginal beneﬁt at the least marginal
• >100,MC > MB-rational maker will not act
• item 101's marginal cost exceeds the beneﬁt it will gain,thus we stay at 100
Principle #4: People Respond to Incentives
A sunk cost is a cost that has already been committed and cannot be recovered.
• no crying over spilt milk
Sunk Costs and an Investment Decision
• Revenues = $9,000
• Costs = $6,000
• Profit = $3,000
You start construction and have spent $1,500. You now realize that revenues will be just
$4,000. Should you complete the project?
• The $1,500 you have already spent is a sunk cost; you cannot recover that money.
• At the margin, the cost of finishing the project is $6