ECON 1 Lecture Notes - Lecture 1: Invisible Hand, Marginal Cost, Opportunity Cost
4/3/18
- “ait: the liited atue of soiet’s esoues
- Economics: the study of how society manages its scarce resources
o How people decide what to buy, how much to work, save, spend
o How firms decide how much to produce, how many workers to hire
o How society decides how to divide its resources between national defense, consumer goods,
protecting the environment, and other needs
10 Principles of Economics
1. Incentives matter
- Incentives: something that induces a person to act (reward or punishment)
- Expected behavior in rational people in response to incentives
- Ex: when gas prices rise consumers buy more hybrid cars and fewer SUVs
2. Markets are usually a good way to organize economic activity
- Maket: a goup of ues ad selles (do’t eed to e i a sigle location)
- Ogaize eooi atiit = deteiig…
• WHAT to produce
• HOW to produce
• HOW MUCH to produce
• WHO gets them
- Market economy: allocates resources through a decentralized decision of many
households/firms as they interact in markets
• Buys and sellers are the main driving forces
• Iisile had ohestatig aket eoo
- The invisible hand works through the price system
• The interaction of buyers/sellers determines prices
• Eah pie eflets the good’s alue to ues ad the ost of poduig the good
• Prices guide self-interested households and firms to make decisions that, in many
ases, aiize soiet’s eooi ell-being
3. People face tradeoffs
- All decisions involve tradeoffs
- Ex: having more money to buy stuff requires working longer hours, which leaves less time for
leisure
- Society faces an important tradeoff between efficiency and equality
• Efficiency: when society gets the most from its scarce resources
• Eualit: he pospeit is distiuted uifol aog soiet’s ees
• To achieve greater equality, we could redistribute income from wealthy to poor. BUT,
this reduces the incentive to work and produce, shrinking the size of the economic
pie
- Making decisions requires comparing the costs/benefits of alternative choices
• Opportunity cost is hat ou’e giig up to otai soethig
4. Rational people think at the margin
- Rational people:
• Systematically and purposefully do the best they can to achieve their objectives
• Make decisions by evaluating costs and benefits of marginal changes, incremental
adjustments to an existing plan
- Ex: the near-zeo agial ost of a ailie takig a eta passege he the flight is’t full
5. The power of trade
find more resources at oneclass.com
find more resources at oneclass.com
Document Summary
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