CH 2

ECON 130 - Principles of Microeconomics Fall 2025 Notes

Introduction

  • This course utilizes the textbook "MODERN PRINCIPLES OF ECONOMICS" Sixth Edition.

  • AI-generated image by Alex Tabarrok, © 2024 Worth Publishers.

Outline of Big Ideas in Economics

Outline (1 of 2)

  • Incentives Matter

  • Good Institutions Align Self-Interest with the Social Interest

  • Trade-offs Are Everywhere

  • Think on the Margin

  • Trade Makes People Better Off

Outline (2 of 2)

  • Wealth and Economic Growth Are Important

  • Institutions Matter

  • Economic Booms and Busts Cannot Be Avoided but Can Be Moderated

  • Inflation Is Caused by Increases in the Supply of Money

  • Central Banking Is a Hard Job

The Big Ideas in Economics

1. Incentives Matter

  • Individuals respond predictably to different types of incentives.

  • Common incentives include fame, power, reputation, sex, and love.

Definition: Incentives

  • Rewards and penalties that motivate behavior.

2. Self-Interest and Social Interest

  • Adam Smith posited:

"It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest."

  • This concept suggests that individuals motivated by self-interest can inadvertently serve the social interest, akin to a market led by an invisible hand.

  • Government intervention can alter incentives through taxes, subsidies, or regulations when markets fail.

3. Trade-offs Are Everywhere
Example: Drug Testing

  • Increased testing can lead to better drug safety but comes with trade-offs, such as delayed drug approval leading to potential harm for patients needing treatments.

  • Trade-off Considerations:

    • Drug Lag: Harm from waiting for safe drugs to be approved.

    • Drug Loss: The possibility that high testing costs might prevent the development of safe drugs.

4. Opportunity Costs

  • Definition

    • The opportunity cost of a choice is the value of the opportunities lost.

  • Scarcity: A resource is labeled scarce when it cannot satisfy all wants.

  • For instance, choosing to attend college may sacrifice the opportunity to work full-time.

Self-Check Questions
Opportunity Cost of Reading the Economics Text

  • Options:

    • Spending time with friends or family

    • The cost of acquiring the economics text

    • Better grades in economics

  • Answer: Reading means less time with friends or family.

5. Think on the Margin

  • Decision-making often involves evaluating marginal benefits versus marginal costs.

  • Marginal refers to one more or less of a unit.

  • Marginal considerations include:

    • Marginal Cost: The cost of producing one additional unit.

    • Marginal Revenue: The additional income from selling one more unit.

    • Marginal Tax Rates: The tax applied to the last dollar of income.

6. Trade Makes People Better Off

  • The benefits of trade extend beyond merely exchanging goods; it fosters increased production through specialization.

  • Trade enables individuals and nations to benefit from economies of scale.

Comparative Advantage

  • Theory: When individuals or nations engage in trade focused on goods with low opportunity costs, it leads to mutual benefits.

7. Importance of Wealth and Economic Growth

  • Economic growth generates wealth which in turn facilitates improved quality of life.

Self-Reflection Question

  • Reflect on daily activities. Consider how many could be executed in an underdeveloped economy lacking services or infrastructure:

    • All of them

    • Most of them

    • Some of them

    • None of them

8. Institutions Matter

  • Institutions create incentives that promote investment in:

    • Physical capital

    • Human capital

    • Innovation

    • Efficient organization

  • The right institutions should support economic growth by ensuring:

    • Property rights

    • Political stability

    • Honest government

    • Dependable legal systems

    • Competitive and open markets

9. Economic Booms and Busts

  • Economic cycles include periods of growth (booms) and decline (busts) which are natural responses to changing conditions.

  • During downturns, indicators such as GDP and employment often reflect negative trends.

  • Government has tools, such as fiscal and monetary policy, which can mitigate economic instability but may inadvertently increase volatility if mismanaged.

10. Inflation

  • Caused by excessive increases in the supply of money without corresponding growth in goods.

    • Definition: An increase in the general level of prices.

    • Historical context: Zimbabwe experienced hyperinflation reaching billions of percent monthly in early 2009.

    • Effects: Unpredictable inflation can erode real values, disrupt economic stability, and lead to general economic distress.

11. Central Banking Challenges

  • The U.S. Federal Reserve (the Fed) plays a critical role in combating recessions but faces time lags between decision-making and observable effects.

  • Economic conditions are dynamic, making policy effectiveness a moving target.

Conclusion

  • Big Idea: Economics not only provides insight into systemic issues but is also highly relevant to daily life.

  • Applications in Daily Life:

    • Understanding economic principles can enrich personal finance, job market navigation, debt management, inflation, and recession awareness.

    • Economics teaches strategic decision-making for improved societal conditions.

Applications in Local Context

  • Examples

  1. Rail Construction: Local news indicates ongoing development with timeframes and implications for the city’s infrastructure.

  2. Housing Initiatives: Discussions around housing reforms link economic theories to real-world needs.

  3. Green Fee Initiatives: Community initiatives such as a proposed $100M green fee reflect economic principles of scarcity and resource allocation.

  4. School Funding: Addressing chronic underfunding of schools demonstrates the importance of investing in human capital for long-term economic benefits.

Homework Assignments

  • Complete Chapter 1 EOC (End of Chapter) Problems and Homework Problems on Achieve by 8am before the next class.

  • Prepare for discussion on the article "Beyond Hotels And Beaches: Can Hawaii Really Diversify Its Economy?"

  • Read Chapter 2 on Trade & Comparative Advantage in the textbook for further insights.