ECON 105 Chapter Notes - Chapter 1: Marginal Cost, Marginal Utility, Opportunity Cost

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20 Nov 2012
Econ 105 Chapter 1
economy comes from the Greek work for “one who manages a household”
Def: the study of how society manages its scarce resources
A group of people interacting with one another as they go about their lives
Opportunity cost: the cost something is what you give up to get it (also known as opportunity cost)
Costs of being in this class: money, time (lecture, assignments, waiting in line at the bookstore), not
being able to do other things, energy, etc.pretty much the next best thing we could do
The 4 Principles of Decision Making (1-4)
#1 “People Face Tradeoffs”
To get one thing that we like, we usually have to give up another thing that we like
Efficiency vs. Equity: The problem with this method is when there is more equity,
efficiency is dropped. Pie example: “when government tries to cut the economic pie into
more equal slices, the pie gets smaller”
#2 “The Cost of Something Is What You Give up to Get It”
Decision makers should be aware of the opportunity costs that accompany each
possible action
#3 “Rational People Thank at the Margin”
The willingness of a person spending a lot of money on a diamond vs. a cup of water is
based on the marginal benefit that an extra unit of the good will yield. (diamonds are
rare and water is abundant)
A rational decision maker takes an action if and only if marginal benefit of the action is
exceeds the marginal cost
Thinking about little bits. Ex) is it worth staying in econ class for another minute.
#4 “People Respond to Incentives”
People’s actions are driven by incentives. Ex) Price apple goes up -> people eat pears ->
farmers grow more apples
Economists think people are evil and always want what is best for them. Ex) too many
doctors are using the sea section delivery because they make more money
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