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Ten principles of economics lecture 1.docx

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McMaster University
Hannah Holmes

Ten principles of economics - Ten ideas that most economists would agree with o Grouped into three areas  How people make decisions (tend to focus on household decisions and firm descions, so individual households deciding whether to go to school or not, what to buy, where to go on vacation,… and individual firms deciding what to produce, what industry to open up in, wheter to build a second factory or not 1. People face tradeoffs  True, you can only be doing one thing at a time Ex. Decided to come to class, instead of sleeping 2. The cost of something is what you give up to get it (opportunity cost)  The idea of whats the next best thing I could be doing with my time Ex. Opportunity cost of sitting in the class is the sleep that you could be getting 3. Rational people think at the margin  (edge, additional) (whats the next/additional step) - when making a desciion, want to weigh the costs and the benfits - the idea of margin means that we are going to compare the additional costs & the additional benefits - forwardlooking, past doesn’t matter; whats the cost/benefit of taking the next step (if benefits greater than the cost, then you take that next step) - include all relevant costs & benefits Ex. Going to university, completed first year and deciding if you go back again for the second year, you look at the costs (tuition,…) and benefits (better paying job,…)  food not a cost cause youd have to pay for food anyways; rent similar situation 4. People respond to incentives (people take advantage of incentive to change a persons behavior) Ex. (aplia, tutorials shift weight of final)  How people interact o 5. Trade can will make (everyone) some people better off (limit on free trade is not good) - international trade - if we can add up all costs to all the people who lose to free trade would be a smaller number than all the people that benefit to free trade - if we can transfer some of the number than we will be better off 6. Markets tend to increase efficiency  (how much stuff we can produce) - more efficient country
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