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Chapter 1

Micro Econ 1B03 chapter 1 summary.docx

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McMaster University
Hannah Holmes

Chapter 1 Summary Micro Economics Disclaimer: These notes are in no way an alternative to going to lectures or reading the textbook, it is simply just a supplementary to the the best of the ability of the individual who wrote these notes of summary. Have fun Studying!!!!l points may be covered but it is done to Economics: Is a study that is concerned with the distribution of scare resources within a society. TEN PRINCIPLES OF ECONOMICS 1. People face trade-offs: Since economics is the study of scarcity and the distribution of all resources available. We will see that not everyone’s wants can be satisfied due to this scarcity. Thus there needs to be trade-offs where one resource will be compromised for another. a. A good example of this would be Efficiency versus Equity. To be efficient means that all resources must be used to their maximum potential and profit. To be equitable means that the resources are distributed fairly. To be fair you must redistribute the resources from those who are richer, meaning the richer will not be getting their maximum potential, ultimately becoming inefficient. b. If you want to buy food, you must trade off your money to get food to eat. c. To work you must trade your valuable resource, time, for monetary gain. 2. The cost of something is what you give up to get it: The total value of a resource is the total value of all alternatives to get it. Meaning everything that one person does to get x must be considered to find its cost. To get this, you must consider both Explicit and Implicit costs. This total cost of getting something can also be referred as the opportunity cost; which is the opportunity values you lost to get something. a. A fine example would be going to school at McMaster. When we all go to school, we all pay a big fee to O’l Man DeGroote. For our case, it’s around $8500 bucks to pay for the program. This can be considered the explicit cost. However, when we got to class for the entire year, we are also missing out on a year’s worth of time. This time can be spent going to work, which can bring an income of $20,000. This income is considered an implicit cost as it is what opportunity you have lost to go to school. Thus the total opportunity cost to get to DeGroote is not only $8500, but $28,500. b. A more relatable experience would be going to the movies and movie hopping to 2 movies. You spent 10 hours of time there while you are at it. The explicit cost for the ticket is $20 for the ticket and overpriced pop with popcorn. However, you have implicit costs of 10 hours which can be turned into $100 if you worked at job. The total opportunity cost is thus $120. 3. Rational people think at the margin: Rational people are those who make actions that always have the most efficient outcome. These people tend to think at the margin, meaning they use marginal changes to an existing plan to see the outcome. Marginal change means small changes, just one unit beyond the existing plans. This can be done comparing marginal benefits and marginal costs. The marginal cost is how much it costs for an extra marginal unit addition, the marginal benefit is how much that change will make by gains. Since this is a pretty confusing principle I will do my best to give examples to show this concept. a. Imagine a company selling airplane seats, the airplane has 100 seats and it costs $100,000 to fly all the seats on the plane. So the Average cost for each seat is $1000. Let us assume that 95 seats were sold and right before take-off, 5 people want to take the seat for $200, should the airplane company sell it to them? ~~~THINK~~~Of course they should! i. The plane has 95 seats filled, but there are 5 seats empty. The plane will take off whether or not the 5 seats will be filled. ii. Although their average cost is $1000, if no one takes those seats, they will make no money at all. iii. Since the seats are not going to make money, adding people to the plane, which would be the marginal change will not add any costs to the actual plane ride. The only cost they will add to the ride would be if they ask for free water or biscuits during the ride. iv. This added cost of free water and biscuits is the marginal costs, as this is what the airplane company needs to spend to add these extra people. v. The $200 these 5 extra passengers pay is called the marginal benefit, as adding 5 extra people will make (5x$200) $1000 more than what would have been zero dollars if the seats were not filled. b. A recycling company has paid all their bills, they paid their rent and employee salaries too for the month. Their services go for $1000 per client visit. Just before the month ends, a married couple walks in and wants to use the recycling company’s service for only $300. Should the boss service them? ~~~THINK~~~ If the boss was thinking at the margin, then yes. i. Since all workers are paid out and all operating costs are completed too, there is no extra cost to service the couple. ii. Although the average income is $1000 per service charge, if they don’t do anything then the boss will get no money at all. iii. The cost to do the job will only be a few garbage bags and the gas fee to get to their house, that marginal cost fee is less than the $300 marginal benefit they would gain from doing that job. iv. It’s either getting zero dollars or get $300. c. The main idea here is that in thinking at the margin, when the marginal cost is
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