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Chapter 1

ECON 102 Chapter Notes - Chapter 1: Opportunity Cost, Market Failure, Externality


Department
Economics
Course Code
ECON 102
Professor
Miles Kimball
Chapter
1

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Lecture 4 Notes
Scarcity: the limited nature of society’s resources
Economics: the study of how society manages its scarce resources, e.g.
how people decide what to buy, how much to work, save, and spend
how firms decide how much to produce, how many workers to hire
how society decides how to divide its resources between national
defense, consumer goods, protecting the environment, and other
needs
PRINCIPLE #1: People Face Tradeoffs
-All decisions involve tradeoffs. Examples: Going to a party the night
before your midterm leaves less time for studying. Having more
money to buy stuff requires working longer hours, which leaves less
time for leisure.
-Protecting the environment requires resources that could otherwise
be used to produceconsumer goods.
-Society faces an important tradeoff: efficiency vs. equality
-Efficiency: when society gets the most from its scarce resources
-Equality: when prosperity is distributed uniformly among society’s
members
-Tradeoff: To achieve greater equality, could redistribute income from
wealthy to poor. But this reduces incentive to work and produce,
shrinks the size of the economic “pie.”
PRINCIPLE #2: The Cost of Something Is What You Give Up to Get It
-Making decisions requires comparing the costs and benefits of
alternative choices.
-The opportunity cost of any item is whatever must be given up to
obtain it.
-It is the relevant cost for decision making.
Examples: The opportunity cost of…
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