Econ 101 Principles of Microeconomics Chapter 1

PRINCIPLE 1-4; University of British Columbia

Economics

Social science that studies the production, distribution of goods and services

Theory of Economics

a method of thinking that helps draw conclusions

Microeconomics

Behaviour of decision makers such as individuals and firms. Operation of specific product, labour, and capital markets.

Resource

Anything that can be used to produce something else (land, labour, materials). Resources are limited.

Meaningful choices

Involve decisions about whether or not to take a specific action.
Limited resources + unlimited wants → scarcity → choice
Balance wants + resources. Never enough stuff to go around.

Cost-benefit rule

Pros and cons list. Take action only of its benefit is at least as large as its cost.
YES: b(x) greater than or equal to c(x). b(x)-c(x) greater than or equal to 0.

Opportunity Cost

The value of the opportunities forgone by taking the action: by choosing to do one thing, you give up what you could’ve had otherwise. Includes implicit, explicit, or both costs

Implicit costs

Involve a benefit forgone but no outlay of money: not monetary but still giving something. Ex. working as a bakery instead of accountant. Salary you gave up from being an accountant is implicit opportunity cost.

Explicit costs

Involves monetary outlay.

Economic interaction

How my choices affect others, vice versa

4 Principles of Individual Choice

1. People make choices because resources are scarce

2. The true cost of something is Opportunity Cost

3. “How much” decisions require making trade-offs at the margin

4. People respond to incentives, exploiting opportunities to make themselves better off.

What is the 1st principle of individual choice and explain.

1. people must make choices because resources are scarce

meaningful choices involve decisions about whether or not to take a specific action.

cost-benefit rule: Comparing benefits and costs. Only take action if its benefit is at least as large as it cost.

• limited income, limited time

• resource = anything that can be used to produce something else

• scarce = when not enough of a resource is available to satisfy all of societies needs.

what is the 2nd principle of individual choice and explain.

2. The true cost of something is Opportunity cost

• Opportunity cost = The next best thing you sacrifice when you make a choice. All costs are opportunity costs because you give up an alternative. By choosing to do one thing, you give up what you could’ve had otherwise. Includes explicit and implicit costs:

Explicit: involves an outlay of money. Monetary. I acquire something in exchange for money.

Implicit: Involves a benefit forgone but no outlay of money. I choose between multiple different options.

EXAMPLE:

you have $10.

Buy a pizza or buy a movie ticket.

Choose pizza: Opportunity cost as movie you gave up

Choose movie: Opportunity cost is pizza you gave up

what is the 3rd principle of individual choice and explain.

3. “How much” Decisions require making trade-offs at the margin

Marginal decisions: “How much” of an action to take. Compare costs and benefits to do more or less of an activity.

Marginal benefit (MB): Incremental BENEFIT of one more unit of the activity

Marginal cost (MC): Incremental COST of one more unit of the activity.

One more slice? One more hour of work?

what is the 4th principle of individual choice and explain.

4. People response incentives

Incentive: what motivates a person to take (not take) an action. Benefit/cost of actions are incentives

Cost-benefit rule implies that people’s behaviour may change of the cost/benefits change. anticipate

→ People will respond to and continue to exploit incentives until fully exhausted.

→ no incentive = highly unlikely to succeed.