ECON 309B Midterm

Economics

The study of human behavior whenever

there is choice

Methodological individualism (assumption)

The individual is the unit of analysis. Economics emphasizes that all social phenomena emerge from individuals' actions and interactions

Purposive, goal-oriented, action (assumption)

Does NOT mean people only care about money and people want to take advantage of others

Individuals economize by considering costs and benefits (assumption)

Individuals seek the desired ends in the least cost way from their perspective. Does NOT mean people never make mistakes, are automatons, or are extremely intelligent

What is Scarcity?

Goods are scarce because there are more

human desires than resources for the

satisfaction of these desires freely available

in nature (CHOICE result)

Scarcity vs Poverty

Absence of poverty implies some basic level of

need has been met. An absence of scarcity would imply that all our desires for goods are fully satisfied. Poverty can be eliminated but scarcity can't

Rationing

Controlled distribution. Every society must have a means to ration scarce resources among competing uses.

Ways to Ration Goods

First-come, first served

- Lottery

- Markets

- Government

- Violence

Competition is Ubiquitous

The fact that we must choose gives rise to

competition among potential alternatives.

Why does Greed not cause Competition?

Even in a world without greed, or without businesses, where everyone cared only about others, there would still be competition because there would still be scarcity

Opportunity Cost

There is no such thing as a free lunch: every

activity has a cost. This cost is whatever we give up to pursue something else.

Implications of Opportunity Cost

If everything involves a cost, and this cost is the next best alternative foregone, this implies that we must make choices about how to allocate time, resources, etc. Ex. One more hour of sleep means one less hour studying.

Marginal

An additional unit

Marginal benefits

The additional benefit from

one more unit of an activity

Marginal costs

The additional cost of one

more unit of an activity

Why Marginal Analysis?

Economics focuses on marginal costs and

benefits, and thus marginal decision making,

because this is what nearly all our actual

choices involve

- Many decisions are not "either-or"

Implications of Marginal Analysis

Individuals engage in an activity when the expected marginal benefit exceeds the expected marginal cost. Individuals refrain from an activity when the expected marginal cost exceeds the expected marginal benefit

Incentives Matter (econ principle)

When the cost of an activity increases (benefit falls) we are less likely to engage in the activity. When the cost of an activity falls (benefit increases) we are more likely to engage in the activity

Incentives Matter Examples

• Charity workers - if the cost of building a soup kitchen

in New Delhi rises, they will build fewer

• Voters - Rainy election day, turnout drops dramatically

• Why do homeowners put "this house protected by..."

signs out?

• Moral hazard - banks, kids, parties to con

The Seen & Unseen

Economics involves looking not just at the observable consequences of choices, but also the unseen consequence.

- Always ask: "And then what....?"

- Example: Bank bailouts and "too big to fail"

- Example: The "silver lining" of war and natural

disasters

Value is Subjective

The value of a good is subjective and varies

with individual preferences. Economics does NOT judge one person's preferences to be "better" or "worse" than another's

Information is Costly

Information can help us make better choices

- However, since information is scarce, uncertainty is a fact of life

Economics is

a way of thinking about the world