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Lec 1- ch1 & ch2.pdf

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University of Maryland
ECON 200
Robert Schwab

Lec 1: ch1 & ch2 Thursday,January 30,2014 10:15 AM 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 Original estimate • 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
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