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Lecture 1

ECON 20A Lecture 1: Lecture 1

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William Branch

Lecture 1 I. Economics and Scarcity a. Economics the branch of knowledge that deals with the production, distribution, consumption, and transfer of wealth i. Economics is the study of how society manages its scarce, or limited, resources b. Most everything is scarce, how to allocate these scarce resources i. Who decides on an allocation? 1. Dictator, government 2. In most societies, it is the uncoordinated decisions of millions of individuals making decisions 3. Allocations work through the interactions of all these people through markets c. Economics studies all of these forces decision making by individuals, by firms, by government institutions i. Focus is on how markets operate to allocate scarce resources ii. Begins by studying how markets should operate in a perfect world iii. Then study what happens in imperfect worlds where there might be instances of market failure II. Ten Principles of Economics a. People face tradeoffs i. Making decisions requires trading off one goal against another ii. A tradeoff economy faces: efficiency and economy 1. Efficiency the property of society getting the most it can from its scarce resources 2. Equality the property of distributing economic prosperity uniformly among the members of society b. The cost of something is what you give up to get it i. Opportunity cost what you give up to get something else c. Rational people think at the margin i. Rational people people who systematically and purposefully do the best they can to achieve their objectives ii. Marginal change a small incremental adjustment to a plan of action iii. People are willing to spend a lot of money for diamonds but not for water. Water is necessary, diamonds are not. A small cup of water is not as beneficial because water is plentiful. Diamonds are not, so an extra diamond is a large benefit. d. People respond to incentives i. Incentive something that induces a person to act ii. Costs and benefits are incentives. Prices are incentives e. Trade can make everyone better off i. Trade allows countries to specialize in what they do best and enjoy a greater variety of goods and services f. Markets are usually a good way to organize economic activity
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