ECON 103 Chapter Notes - Chapter 2: Marginal Utility, Economic Model, Optimism

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19 Jan 2018

School

Simon Fraser University

Department

Economics

Course

ECON 103

Professor

Douglas Allen

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Chapter 2: Maximization (Pgs. 21-43)

Introduction

- For economists, there is only one source of motivation: greed

o The all it self-loe aiizatio

o Individuals are just trying to do their best under their circumstances

o But eooists at to tr to ie all ehaior as a effort to iproe oe’s situation

or well-being: alled utilit

- People try to get as much utility as possible given their circumstances

- Principle #1 - Maximization: All individuals are always motivated by greed

- Economics is about explaining behavior, not condoning actions or suggesting others

o Economists simply use this assumption because it works

- Maiizatio does’t ea that people are alas sart or orret

o Just eause people hae greed does’t ea that the’ll e right

o Greed does’t ea ore is alas preferred to less → non-satisfaction (nonsatiated)

o Economists often make assumptions of nonsatiation to make models work better, but it

is ot eessar, ad should’t e ofused ith aiization

- Greed is the edrok for eooists, its hat akes a arguet eooi

- A non-economic argument could be one based on altruism (non-greedy behavior)

- Motivation is not observable (why we have to assume the first principle), and any specific

behavior can always be explained away as consistent with greed or altruism

o Wh ould eooists at greed oer soe ier otiatio as a startig priiple?

- Belief in maximization has several impressive implications clearly observed around us

o Including: Scarcity, exchange, equilibrium

Part 2.1: Scarcity

- Scarcity is confused with rarity all the time

o Rarity means that something is in short supply

o To be scarce means that people want more of a good than is available when the good is

free; it may also be rare but does’t hae to e

- If the price of a good is zero and people want more than what is available, then that good is

scarce

- This concept is a result of greed

- Has several implications:

o Since the world is full of scarcity, there never will be enough of everything

o Everything is just not _____ enough, and its maximization at work in our lives

- From scarcity, we are faced with making choices

- Since there is never enough of the things we want, the only way we can get more of one thing is

to give up something else; this is unavoidable

Part 2.2: Equilibrium

- By equilibrium, economists mean a situation where no one wants to change their behavior

- An equilibrium will always be reached when individuals and firms maximize

o If people get together to increase their wealth, and the do’t full eploit eer

opportuit to do so, the the hae’t aiized

- Biggest example is driving on the freeway with 2 lanes

o The outcome of an equilibrium was the result of individuals trying to maximize

- Economists often analyze equilibrium with a oept alled the argi

o Margi eas a sall aout or a sall hage

o Indifference comes into play here, as people may be indifferent to taking action in

equilibrium (no marginal benefit to taking action)

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Document Summary

For economists, there is only one source of motivation: greed: the(cid:455) (cid:272)all it (cid:862)self-lo(cid:448)e(cid:863) (cid:373)a(cid:454)i(cid:373)izatio(cid:374) Individuals are just trying to do their best under their circumstances: but e(cid:272)o(cid:374)o(cid:373)ists (cid:449)a(cid:374)t to tr(cid:455) to (cid:448)ie(cid:449) all (cid:271)eha(cid:448)ior as a(cid:374) effort to i(cid:373)pro(cid:448)e o(cid:374)e"s situation or well-being: (cid:272)alled (cid:862)utilit(cid:455)(cid:863) People try to get as much utility as possible given their circumstances. Principle #1 - maximization: all individuals are always motivated by greed. Economics is about explaining behavior, not condoning actions or suggesting others: economists simply use this assumption because it works. Ma(cid:454)i(cid:373)izatio(cid:374) does(cid:374)"t (cid:373)ea(cid:374) that people are al(cid:449)a(cid:455)s s(cid:373)art or (cid:272)orre(cid:272)t. Greed is the (cid:271)edro(cid:272)k for e(cid:272)o(cid:374)o(cid:373)ists, its (cid:449)hat (cid:373)akes a(cid:374) argu(cid:373)e(cid:374)t (cid:862)e(cid:272)o(cid:374)o(cid:373)i(cid:272)(cid:863) A non-economic argument could be one based on altruism (non-greedy behavior) Belief in maximization has several impressive implications clearly observed around us. If the price of a good is zero and people want more than what is available, then that good is scarce.

Related Questions

1.The production possibilities frontier can be used to demonstrate which of the following?
(i) The best tradeoffs that individuals and societies should make
(ii) The tradeoffs forced on individuals and societies because of scarcity
(iii) The wealth maximizing output combination that an individual or society should choose

Select one:

a. (ii) only

b. (i), (ii) and (ii)

c. (i) only

d. (iii) only

2. Unlimited wants and limited resources:

Select one:

a. Can be overcome through innovation

b. Are not problems faced by wealthy industrialized nations

c. Necessitate choices about the goods to services to consume

d. Can be overcome by increasing wealth

3. What are the two sub-fields of economics?

Select one:

a. For-profit economics and not-for-profit economics

b. Private markets and the public sector

c. Microeconomics and macroeconomics

d. Market and non-market economics

4. What do economists mean by "self-interested behavior"?

Select one:

a. It means undertaking activities that benefit yourself and a small group of others who are important to you

b. It means undertaking activities motivated by greed

c. It means undertaking activities that maximize one's own welfare

d. It means wanting to pursue a life of leisure

5. When economists say that people act rationally, they mean that:

Select one:

a. People do not make incorrect choices

b. People are governed by what others think about them and act accordingly

c. People consider the significant consequences of their actions and make decisions that further their self-interests

d. There are certain common codes of conduct that everyone adheres to

6. Which of the following actions reflect self-interested behavior?
(i) Warren Buffett, one of the world's wealthiest individuals, donated more than $30 billion to humanitarian causes such as AIDS and tuberculosis initiatives.
(ii) Pfizer Inc., a private pharmaceutical company, sponsored a disease-management program for Florida's Medicaid patients with chronic illnesses such as asthma, diabetes and heart disease.
(iii) You agree to babysit your 8-year-old brother instead of going to a kick-boxing class.
(iv) You agree to babysit your 8-year-old brother instead of going to a kick-boxing class only if your mother pays you $8 an hour.

Select one:

a. All of the above actions except (iii)

b. All of the above actions

c. (ii) and (iii) only

d. (iv) only

7. Which of the following does not qualify as a market?

Select one:

a. Bloomingdales Department Store

b. The underground drug trade

c. Amazon.com

d. The French Immigration Department

8. Which of the following is not a key assumption of economics?

Select one:

a. People do not undertake activities that make others better off

b. People are self-interested

c. People have limited resources to acquire their wants

d. People are rational

9. Which of the following is not likely to cause the production possibility frontier to shift out?

Select one:

a. An increase in the quantity of innovations

b. An increase in specialization which allows people to develop higher levels of skill at their chosen profession

c. Developing markets where self-interested individuals can interact

d. Relying only on governments to allocate resources

10. Which of the following statements is false?

Select one:

a. Scarcity affects everyone, including very wealthy people

b. Rational people never make mistakes

c. Economists assume people are rational

d. Economists assume people have unlimited desires

11. Which of the following statements is false?

Select one:

a. When you volunteer to help at a soup kitchen, you face an opportunity cost of your time

b. Mother Teresa faced trade-offs when deciding to help lepers in India rather than some other needy group

c. Economics brings tradeoffs to light but does not inform us of which trade-offs society should make

d. When the government funds research into cancer, it is able to avoid trade-offs because public funds are used rather than private funds

12. Which of the following topics does economics study: (i) the study of human behavior; (ii) the market for organ transplants; (iii) cost and benefits of building a suicide barrier in the Golden Gate Bridge; (iv) the functioning of political institutions.

Select one:

a. (i) and (iii) only

b. (ii) and (iii) only

c. All of the topics listed

d. All of the topics except (iv)

13. Which the following would be likely to raise your opportunity cost of going to college full-time?
(i) You have been offered a full-time job as wardrobe assistant to Paris Hilton that pays $60,000 per year.
(ii) You have been offered a merit scholarship that pays for two years of tuition.
(iii) Your landlord increases the rent on the apartment you are currently living in and will continue to live in even if you choose to attend college full-time.
(iv) An increase in the value of your college trust fund set up by your grandfather.

Select one:

a. All of the above

b. (i) and (iii) only

c. All of the above except (ii)

d. (i) only

14. While microeconomics is concerned with the behavior of individuals and firms, macroeconomics:

Select one:

a. Does not make use of "micro" ideas such as opportunity cost or self-interest

b. Is concerned with the performance of entire economies

c. Is concerned with normative matters such as fairness, equality and ethics

d. Is only concerned with government activity

15. You own a Ford car that has lousy gas mileage. You finally trade it for a Hyundai, which is equal in virtually every aspect except that the Hyundai gets much better mileage. What is likely to happen to your gas consumption?

Select one:

a. I get better gas mileage and since the cost of driving has gone down, I will drive more so my gas consumption will remain the same

b. It will fall since I will now use less gas

c. I get better gas mileage and since the cost of driving has gone down, I will drive more so the effect on my gas consumption is indeterminate

d. It will go up since I will now drive more

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ECON 103 Chapter Notes - Chapter 2: Marginal Utility, Economic Model, Optimism

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