ECON101 Chapter 3: Chapter 3 notes

• School: University of Waterloo
• Department: Economics
• Course: ECON101
• Professor: Alain- Desire Nimubona

Document Summary

Econ 101: introduction to microeconomics, winter 2014, university of waterloo. During weeks 1-8 of the course we have covered the three key lessons of this course. Economists assume that when people make choices, they carefully evaluate the costs and bene(cid:133)ts and make good choices ((cid:147)behavior is optimization(cid:148)). When our choices do not have direct external e ects on other people, self-interest and markets alone lead to good allocations ((cid:147)(cid:133)rst welfare theorem: the competitive equilib- rium is pareto e cient(cid:148)). When our choices do have direct external e ects on other people, government inter- vention can result in a better allocation than the allocation determined by self-interest and markets alone ((cid:147)externalities are the main economic rationale for government intervention(cid:148)). First, that assumption about behavior is what sets economics apart from other social sciences (such as sociology and psychology). Second, that assumption is the starting point for virtually all modern economic analyses.