Chapter 1 condensed
Econ: Chapter 1 notes
Economics as asubject:
-Economics: The study of how people make choices
underconditions of scarcity and the result of those choices for
Micro and MacroEconomics:
-Micro Econ: Thestudy of individual choices under scarcity and the
implications of these choices for the behaviors ofprices and
quantities in individual markets.
-Macro Econ: The study of the performance of nationaleconomies
and the policies that governments use to try to improve
-Alfred Marshall- An economist of the 19 andearly 20 century
who published Principlesof Economics (focused on micro econ).
-John Maynard Keynes: A Birtish economist whose “ The general Theory of Employment interestand Money” is widely regarded as
the seminal work in modern macroeconomics.
Economics as a socialscience:
- Economic theories are often expressed as abstract
models;involves abstracting from unnecessary details.
- Economic model: A representation of economic reality
thathighlights particular variables and the relationships among
-Rational decision maker: Someone with clear objectives
whobehaves logically to achieve those objectives.
-Adam smith: A Scottish economist who wrote “The wealth of
nations” probably the mostinfluential economics book ever written.
1.2 Scarcity,Rationality, and the Cost-Benefit Principle:
-The scarcity problem: Because material and human resourcesare
limited, having more of one good thing usually means making do
with less ofsome other good thing.
-The cost benefit principle: A rational decision maker will take an
economic action if, and only if,the extra benefits from taking the
action are greater than the extra costs.
- Opportunity cost: The value of the next-best alternativethat must
be foregone in order to undertake an activity.
-Opportunity costs can be implicit or explicit: Explicitopportunity
costs involve an outlay or a payment. Implicit opportunity costs
donot involve actual payments.
Three ImportantDecision Pitfalls:
-Researchers have identified situations in which people tendto
apply the cost-benefit principle inconsistently.
-Pitfall1: Ignoring opportunity costs: Many people makeflawed
decision because they tend to ignore the value of forgone opportunities.Ex. If buying a computer game downtown means not
watching the end of yourmovie, then the movie is the implicit cost
of that trip/opportunity cost.
-Pitfall 2: Failure to ignore sunk costs: Sunk costs arecosts that are
beyond recovery at the moment a decision is made. They cannot
beavoided even if the action is not taken. Ex. Money spent on a
non-refundable/non transferrable airline ticket.
-Pitfall 3: Failure to understand The Average Marginal Distinction:It
is a mistake to increase an activity simply because its average
benefit isgreater than its average cost or to reduce an activity
simply because itsaverage benefit is lower than its average cost.
Total benefit can be increasedby decreasing the activit