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ECN 104 (388)
Chapter 1

ECN 104 Chapter 1.docx

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Department
Economics
Course
ECN 104
Professor
Tsogbadral Galaabaatar
Semester
Fall

Description
Economics is the study of how society manages its scare resources. Scarcity means that society has limited resources and therefore cannot produce all the goods and services people wish to have. How people make decisions Principle #1: People Face Tradeoffs To get one thing, we usually have to give up something else. Think of the allocations of your time and money etc. -If you want to buy a new Iphone today, you have to wait before buying a new laptop. -If you invest in a stock, you are giving up other forms of investments, such as RESP and bonds. -For every hour studying, you could have worked. Society faces the tradeoff between efficiency and equity. Efficiency-getting the most out of resources. Equity-fairness of economic allocation/prosperity Efficiency can be referred to the economic pie, and equity to how the economic pie is divided among society’s members. Principle #2: The cost of something is what you give up to get it Opportunity cost: what you give up to obtain something. -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. “There is no such thing as free lunch” Principle #3: Rational People Think at the margin Rational people: someone always try to do their best to achieve their objectives 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 an existing situation or plan. Rational people make decisions by comparing marginal benefits and marginal costs. -suppose you have already eaten 3 tacos. Where to have an extra taco depends on the 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). Principle #4: People respond to incentives Incentives-something, such as a punishment or reward, that induces action. Rational people respond to incentives -if price of gasoline rises, people drive less. -If a neighboring country lets 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 their 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 a result, there were no changes 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 #4: People Respond to Incentives Incentives-something, such as a punishment or reward, that induces action. Rational people respond to incentives -if price of gasoline rises, people drive less. -If a neighbouring country lets people visit without a visa, the number
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