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Midterm

Econ 2030 Exam 1 Notes (highest grade in class)

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Department
Economics
Course
ECON 2030
Professor
All Professors
Semester
Fall

Description
IntroductionDay 1What is economicsThe word economy comes from the Greek word for one who manages the householdWhat do parents do everyday Make decisionsThe household must allocate its scarce resources among its various family members taking into account each members abilities efforts and desiresLike a household a society also faces many decisionsA society must decide what jobs and who will do themEconomicsstudy of how society manages its scarce resources a behavioral scienceDivision of EconomicsMicroeconomics study of how households and firms make decisions and how they interact in marketsMacroeconomics study of economy wide phenomena including inflation unemployment and economic growthChapter 1 Economics and Economic Reasoning Day 2Economicsstudy of how society manages its scarce resources behavioral sciencestudy how human beings coordinate their wants and desires given the decision making mechanisms social customs and political realities of the societyCoordination in EconomicsAny economic system must face and solve three coordination problemswhat and how much to producehow to produce itfor whom to produce itMarginal Costthe additional cost above the costs you have already incurredSunk Costthe cost that has already been incurred and cannot be recoveredWhat is the marginal cost of driving to school Money you pay for the gasolineWhat is the sunk cost The money you paid for buying the carWhat is the sunk cost of attending this class TuitionExample Suppose there is a 200 seat plane and the plane is about to take off with ten empty seats and there is a standby passenger waiting at the gate What is the marginal cost for the airline company if they accept this standby passengera drink or a cookie whatever the passenger consumes gas marginal benefit money from ticketExample 2 You rent a car for 2995 The first 150 miles are free but each mile thereafter costs 15 cents You drive it 200 miles What is the marginal cost of driving the car What is the sunk costSunk cost 2995Marginal cost 200 miles150 miles50 miles 50 miles times 15 cents750 price of gasMarginal Benefitsthe additional benefit above what you have already derivedWhat is the marginal benefit of attending this class Knowledge Credit for MajorWhat is your decision based on the marginal benefit and marginal costCompare the cost to the benefit and if benefit greater attend class but if not sleep lateOpportunity Costthe best alternative that we give up when we make a choice or a decision There is no such thing as a free lunchExample 3 What is the opportunity cost of teaching Sleeping at home watching on tv working on my dissertation Example 4 Suppose that you are considering going toa concert Tickets cost 60 If you go to the concert you will have to miss 4 hours of work where you are making 10 an hour What is your total opportunity cost of going to the concert measured in dollars given up 40 and 60 Because if you dont go to the concert you can save the 60 and spend on something elseExample 5 Suppose that after studying 7 hours for an econ test you are confident that you know enough to make a B However if you study one more hours instead of watching your favorite TV show you will probably improve your grade to an A Identify the marginal costs and benefits in the situation Marginal cost extra hour to do something else benefit A on testExample 6Suppose you currently earn 30000 a year You are considering a job that will increase your lifetime earnings by 300000 but that requires an MBA The job will mean also attending business school for two years at an annual cost of 25000 You already have a bachelors degree for you spent 80000Sunk cost 80000 you paid alreadyMarginal Cost 5000060000 two years of workingOpportunity Cost 60000 50000 two years of schoolMarginal Benefit Increased earnings of 300000Economics and Market Forces Economic forces mechanisms that ration scarce goodsA market force is an economic force that is given relatively free rein by society to work through the marketThe invisible hand is a market force that rations goods by changing prices
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