ECO-2000 Study Guide - Midterm Guide: Marginal Utility, Terrassa, Marginal Cost

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Intro to Economics 2/13/2014 6:24:00 AM
ECONOMICS NOTES
Thursday, January 30th First Essay Due
#1: Incentives Matter:
o Choice is influenced in a predictable way by changing
incentives
Picking up the penny, dollar, five (Money Game)
Killer Seatbelts
If you feel safer when wearing a seatbelt your
drive more recklessly
Prices
If candy bars are cheaper you’ll buy more and
vice versa
o The economic principle influences all people
Students will do more work on assignments worth more
points
Politicians: do the most to maximize votes
Altruists (missionaries, Mother Tarrasa): if costs were
too high to build an orphanage in NY they move it to a
cheaper place
Criminals: If a house has a ADT security sign they prop
wont rob you
o Individual are rational: getting most from limited resources
“Greatest benefit with least cost”
What’s the least amount of work I can do to get
an A
NOTE: What is rational for one may not be rational for
others
If you don’t like getting hit with paintball you
wont play
But if you like playing you may take the pain
o Utility: The benefit or satisfaction a person expects from a
choice or course of action
Getting an A on a test you’ve been studying for
#2: There s No Such Thing as a Free Lunch
o Because resources are scarce, trade offs must be made
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o Even if its free for you doesn’t mean its free for society
o Opportunity Cost: The highest valued alternative that must be
sacrificed when choosing an option
Choose one thing and give up something else
An hour of your time
Spending time in class rather than sleeping
How you spend your next $15
o If you spend 15 there you cant spend
it on your next highest valued item
50 Billion dollars for airbags for 400 lives or
50 Billion for cancer research?
What is the biggest cost of college?
You could be working and making 100k over
4 years
#3 Decision are made at the Margin
o Describes the effect of a change in the current situation
Marginal = Change or Additional
Ponderosa Buffet
McDonalds
Add $.70 to supersize your order for bigger
fries and drink
Fly or drive
100$ to drive and 8 hours
$400 to fly and 1 hours flight
o Law of Diminishing Marginal Utility: as you consume more
and more of something you tend to like it less and less
The more you listen to the song the worse it gets
Banana Eating Contest
Diamond- Water Paradox:
Why are diamonds so expensive if they
don’t help us, while water we need for life is
so cheap
o We have so much water that the next
gallon isn’t worth much, but we have
no diamonds
Total value: water is worth more
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Marginal Value: diamonds are worth more
o Cost- Benefit analysis: when making a decision one compares
the marginal benefit and the marginal cost
Comparing costs to benefits
To be economically efficient:
All actions generate more benefits then costs
should be undertaken
No action generating more costs then benefits
should be undertaken
If we take away all the plane crashes well have to
make them more expensive to keep planes
perfect. This would cause more people to drive
which is more dangerous and more people would
die
A lot of people will not be fully informed when making
decisions
Bigger the decision the more informed you’ll get
and the smaller the decision the lease informed
you'll be
Car vs. Pencil
#4 Voluntary Trade Promotes Economic Progress
o Voluntary vs. Coerced
Coerced: Someone will devote resources to make you
worse off if you don’t comply
Ill blow your brains out if you don’t give me your
wallet
Voluntary: The decision is up to you, voluntary
exchange
Because the value of a good or service is subjective,
voluntary trade moves goods from people who value
them less to people who value them more
Trade makes larger output and consumption
levels possible because it allows us to specialize in
what we do best
We live impoverished lives, we don’t make
anything ourselves
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