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Chapter 1

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Robert Gazzale

Chapter 1 condensed Econ: Chapter 1 notes I.1 Economics as asubject: -Economics: The study of how people make choices underconditions of scarcity and the result of those choices for society 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 thatperformance. -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 them. -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. 1.3 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
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