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ECN 211 (11)
Chapter 1

ECN 211 Chapter 1: Reading Notes- Chapter 1 10 Principles of Economics

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ECN 211
Stefan Ruediger

Mankiw (author of book) Intro Video: • Economics- how society manages its scarce resources ◦ A study of mankind in the ordinary business of life ◦ It's about people: how they make decisions, interact with one another, and how their interactions influences the course of society overall • Learning economics will be useful in any career path Chapter 1: 10 Principles of Economics PRINCIPLES 1-4: HOW INDIVIDUALS MAKE DECISIONS • #1: People face trade-offs ◦ To get something we like, we usually have to give up something else that we like ◦ Ex: ‣ Time • Study for Econ or study for psych? • An hour spent studying for Econ -> gave up -> an hour she could've spent studying for psych • Hours spent studying -> gave up -> hours she could've spent napping, watching tv, working, etc. ‣ Money • Food, clothing, or family vacation • Choosing to spend an extra dollar on one of these goods -> gave up -> one less dollar to spend on some other good ‣ Society (guns & butter) • The more society spends on national defense (guns) -> gave up -> less it can spend on consumer goods (butter) ◦ Efficiency vs. equality ‣ Efficiency- society is getting the maximum benefits from its scarce resources ‣ Equality- those benefits are distributed uniformly among society's members • #2: The Cost of Something is What You Give up to Get It ◦ Making decisions requires comparing the costs and benefits ◦ Ex. ‣ Go to college • Benefits: intellectual enrichment, lifetime of better job opportunities, etc. • Costs: money spent on tuition, books, room and board, time etc. • Some you can calculate, and some you can't ◦ Opportunity cost- of an item is what you give up to get that item ‣ Best alternative use of your resources ‣ Ex. • Buy a coke for $2 ◦ Was it best to spend $2 on soda? Or could there have been a better use of the $2? (Pen and pencils?) ◦ Ex. ‣ College athletes drop out of school and play professional sports • Benefits: make millions $ • Costs: not getting a college education • Opportunity cost of attending college is very high • Many decide that the benefit of a college education is not worth the cost ◦ Cost doesn't need to be only in terms of money; it can be in terms of time • #3: Rational People Think at the Margin ◦ Rational people- people that systematically & purposefully do the best they can to achieve their objectives, given the available opportunities ◦ Ex. ‣ Dinner time • Not thinking: "should I fast or eat like a pig?" • Actually thinking: "should I take that extra spoonful of mash potatoes?" ‣ Exams • Not thinking: blow exams or spend 24/7 studying? • Actually thinking: spend an extra hour reviewing notes or watch tv? ◦ Marginal change- a small incremental adjustment to an existing plan of action ◦ Marginal decision making ◦ Ex. ‣ Why is water so cheap, while diamonds are so expensive? • Humans need water to survive, while diamonds are unnecessary ◦ But for some reason people are willing to pay much more for a diamond than for a cup of water • Conclusion ◦ Water is essential but the marginal benefit of an extra cup is small because water is plentiful ◦ No one needs diamonds to survive, but because diamonds are so rare, people consider the marginal benefit of an extra diamond to be large ◦ Rational decision makers take an action only if the marginal benefit of the action exceeds the marginal cost • #4: People Respond to Incentives ◦ Incentive- something (punishment or reward) that induces a person to act ◦ Ex. ‣ Price of an apple rises • People decide to eat fewer apples, apple orchard hire more workers and harvest more apples • Higher price in a market provides... ◦ an incentive for buyers to consume less ◦ an incentive for sellers to produce more ‣ Tax on gas • Encourage people to drive smaller, more fuel-efficient cars, carpool, take public transportation, live closer to work, drive hybrid cars or electric cars, etc. ◦ When policy makers fail to consider how their policies affect incentives, they end up with unintended consequences ◦ Ex. ‣ Laws requiring seat belts in cars • Obvious effect: when a person wears a seat belt, the probability of surviving an accident rises • People drive more slowly and carefully when the benefit of increased safety is high ◦ It is costly because it uses the driver's time and energy • People respond to seat belts by driving faster and less carefully • Conclusion ◦ Seat belts result in little change in driver deaths and an increase in pedestrian deaths PRINCIPLES 1-4: HOW INDIVIDUALS MAKE DECISIONS PRINCIPLES 5-7: HOW INDIVIDUALS INTERACT W/ ONE ANOTHER • #5: Trade Can Make Everyone Better Off ◦ Trade between two countries can make each country better off ‣ It is not a win/lose situation • #6: Markets are Usually a Good Way to Organize Economic Activity ◦ Market economy- the decisions of a central planner are replaced by the dec
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