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ECN 104 (388)
Chapter 1

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ECN 104
Tsogbadral Galaabaatar

1 Economics Chapter 1 Scarcity: the limited nature of society’s resources. Natural resource, land & workers time are all limited in its availability Economics: The study of how society manages its scarce resources Principle #1: People face trade-offs To get one thing, we usually have to give up something else ,“There is no such thing as a free lunch” Firms  What to produce, how much to produce, how many workers to hire, etc. Individuals  What to purchase, how much to save, how many hours to work, etc. Efficiency: The property of society getting the most it can from its scarce resources Equity: The property of distributing economic prosperity fairly among the members of society Principle #2: The Cost of Something is What You Give Up to Get It Opportunity Cost: Whatever must be given up to obtain some item.  To become a doctor, you need to go to medical school. In addition, you are giving up other career paths.  Waiting in a long line for a free item costs your time. Principle #3: Rational People Think at the Margin Rational People: People who systematically and purposefully do the best they can to achieve their objectives Rational people make decision by comparing marginal benefits and marginal costs.  Suppose you have already eaten 3 tacos. Whether to have an extra taco depends on price of the taco (marginal cost) and the extra satisfaction it gives (marginal benefit).  To study one more hour the night before the exam has benefits and costs (less sleep). In economics, we usually assume that firms’ objective is to maximize its profit and consumers' objective is to achieve the highest level of satisfaction. Marginal Changes: Small incremental adjustments to a plan of action Principle #4: People Responds to Incentives Incentive: something that induces a person to act  Rational people responds to incentive 2  If price of gasoline rises, people drive less.  If a neighboring country let people visit without a visa, the number of tourists will increase.  If a famous food critic is waiting for a dinner, the chef is trying her/his best. When government changes a rule or regulation, it gives an incentive to (some) people to change their action. When the government didn’t think thoroughly about all the incentives, unintended consequences can happen.  Seat belt law changes how people drive. As result, there were no change in the number of driver deaths.  Some say, to decrease the number of concussions in the NFL, you need to stop the use of helmets. Principle #5: Trade can Make Everyone Bet
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