ECN 001A Lecture Notes - Lecture 1: Opportunity Cost, Invisible Hand, Externality
4/4/18: LECTURE 1
CHAPTER 1: 10 PRINCIPLES OF ECONOMICS
ā¢ WHAT ECONOMICS IS ALL ABOUT
o scarcity: limitations of societyās resources (factors of production) to satisfy needs and
wants efficiently
āŖ Cannot produce all the goods and services people wish to have
āŖ can be restrictions of time, money, abilities, etc.
āŖ We choose how to use our scarce resources to satisfy our unlimited wants
o Economics: study of how society manages its scarce resources
āŖ how people decide what to buy, how much to work, save, and spend
āŖ how firms decide how much to produce and how many workers to hire, what
to produce
āŖ How society decides to decide its resources between national defense,
consumer goods, protecting the environment, and other needs
ā¢ THE PRINCIPLES OF HOW PEOPLE MAKE DECISIONS
o 1. People Face Tradeoffs
āŖ all decisions involve trade offs (a loss and a gain)
ā¢ Going to party before midterm: less time to study
ā¢ Having more money to buy stuff requires longer work hours: leaves
less time for fun
āŖ due to limited resources
āŖ society faces an important trade off: efficiency vs. equality
ā¢ Efficiency: when society gets the most from its scarce resources
ā¢ Equality: when prosperity is distributed uniformly among societyās
members
ā¢ Trade off faced: to achieve greater equality, could redistribute income
from wealthy to poor. But this reduces incentive to work and produce,
shrinks the size of the economic āpieā
āŖ Taxes versus Government Spending
ā¢ taxes reduce market efficiency
ā¢ taxes used to support a range of goods and services: roads, police,
schools, etc.
o 2. The Cost of Something is What You Give Up to Get It
āŖ making decisions requires comparing the costs and benefits of alternative
choices
āŖ Opportunity Cost: whatever must be given up to obtain an item
ā¢ the thing you would be doing if not have taken on the opportunity
ā¢ Examples:
o Going to college for a year not only tuition, books, and fees,
but also the foregone wages from working a job
o Seeing movie is not only ticket price, but the value of the time
spent in theatre
o 3. Rational People Think at the Margin
āŖ Rational People:
ā¢ systematically and purposefully do the best they can to achieve their
objectives
ā¢ make decisions by evaluating costs and benefits of marginal changes
o marginal changes: incremental adjustments to an existing
plan
o Ex: when a student considers whether to go to college for
another year
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But this reduces incentive to work and produce, shrinks the size of the economic pie : taxes versus government spending taxes reduce market efficiency taxes used to support a range of goods and services: roads, police, schools, etc, 2. Markets are usually a good way to organize economic activity home: market: a group of buyers and sellers (need not be in a single location) If the market distribution of economic well-being is not desirable, tax, or welfare policies can change how the economic pie is divided: the principles of how the economy as a whole works, 8. A country"s standard of living depends on its ability to produce goods and. Prices rise when the gov prints too much money. Society faces a short-run tradeoff between inflation and unemployment. In the short-run (1-2 years), many economic policies push inflation and unemployment in opposite directions.