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ECON2105 Chap. 1
ECON2105
What is economics?
We want more than what we want, but because of scarcity we must make decisions.
Our decisions re dependent on the incentives.
An incentive is a reward than encourages an action or a penalty that discourages an action.
What do we study in economics: PEOPLE
Core Principles of ECON:
Cost-Benefit Principle
· Keep doing something until the marginal cost = marginal benefit
· Only do something if the benefit is as large or larger than the cost
· Compare intangible benefits to monetary cost by using willingness to pay
· Convert each cost and each benefit into its monetary equivalent
· Cost of buying and maintaining a car for work vs. Benefit of not spending money on an uber
Opportunity Cost Principle
· Opportunity Cost is your next best alternative
· All choices require a trade-off
· Time is scarce, to come to class you must give up another activity (sleep, gym, etc)
· Not all out of pocket costs are real opportunity costs
· Ask “or what” to find the next best alternative
· Sunk cost: cost in the past, cant be reversed
· PPF – Production Possibilities Frontier: illustrates trade-offs between 2 choices
Marginal Cost Principle
· What are the costs and benefits of doing one more of something
· Keep on doing more as long as the marginal benefit is larger than the marginal cost.
· Should I buy one more? à Is MB > MC? à yes? Keep going! No? stop!
Interdependence Principle
· The choice you makes depends on your own choices, people/firms in a market, markets, and time
· When any of those markets change, your best choice might change “what else?”
· Your choices: If you take an econ class, you wont be able to take other classes at the same time.
· Others’ choices: If another student takes the last spot, you’ll have to pick a different class.
· Other markets. If you believe the skills you learn in ECON have become more valuable, you’ll choose different classes.
· Future choices: Your decision to study Econ today changes the classes you meet the prerequisites for.
