ECO101H1 Chapter Notes - Chapter 1: Externality, Opportunity Cost
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The Ten Principles:!
How People Make Decisions
1. People Face Tradeoﬀs
1. In order to get one thing, one has to give something up!
1. Opportunity Cost!
2. Eﬃciency Vs. Equity!
1. Increases taxes on the riches to distribute to the poor (more equity) but
this also discourages the rich to work harder (less eﬃciency)!
2. The Cost of Something is What You Give Up to Get it
1. Opportunity Cost = Whatever must be given up !
2. Opportunity Cost = Opportunity Lost!
3. Rational People Think at the Margin
1. Rational People = People who systematically and purposefully do the best to
achieve their objectives!
1. Decisions in life are not Black and White -> Shades of Grey !
2. Maximize their beneﬁts even though some opportunities will be lost, they are
still able to achieve their ultimate goals!
2. Marginal Changes!
1. The small incremental adjustments to an existing plan of action!
1. Tiny adjustments that does not change one’s ultimate objectives (around
the edge of what one is doing)!
2. Rational People make decisions -> Marginal Cost VS Marginal Beneﬁts!
1. If Marginal Beneﬁts > Marginal Cost (The decision is worth)!
4. People Respond to Incentives
1. Incentives -> Something that generates the action of a person!
1. If the incentives change, people’s behaviour will change as well!
How People Interact:
5. Trade can Make Everyone Better Oﬀ
1. Trades allows one to specialize in the activities that he/she is good at!
1. Therefore, people can buy a greater variety of goods & services at lower cost!
6. Markets Are Usually a Good Way to Organize Economic Activity
1. Market Economy -> An economy that allocates resources based on the
decisions of many as they interact in markets for goods & services instead of
one central planner!
2. Prices and Self-Interests drive them to make decisions!
3. Adam Smith “Invisible Hand”!
1. He disagreed on Government’s intervention on the market!
7. Governments Can Sometimes Improve Market Outcomes
1. Government needs to enforce the rules & maintains the institutions that are key
to a market economy -> in order for Invisible Hand to work!
1. Property Right!
1. Enforce one’s ability to own and control over scarce resources!
2. Market Failure!
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