Econ 1b03 Textbook Notes
CHAPTER 1
• Economics o Study of how societies manage their scarce resources
• Ten Principles of Economics o People face tradeoffs
• Making decisions involves trading off one goal for another
Example: In order to study properly for a final exam, students must give up most of their social life during exams
• Societies face the tradeoff between efficiency and equity
An efficient society gets the most it can from its scarce resources
An equitable society distributes the benefits of its resources fairly amongst its members
To achieve one goal completely, society must give up the other
• Example: Welfare increases equity, but decreases efficiency (higher unemployment) o Cost of a decision/goal is what was given up to achieve it
• Known as opportunity cost
• Good decisions are made by taking opportunity cost into account o Rational people think at the margin
• Rational people know that decisions are not black and white
• By comparing the marginal benefit of a decision to the marginal cost, individuals make marginal changes to an already existing plan of action
• Example: Water vs. Diamonds
Diamonds are more expensive because the marginal benefit of an additional cup of water is small due to the abundance of water, and the marginal benefit of an additional diamond is high because of the scarcity of diamonds o People respond to incentives
• Incentive is something that induces a person to act
Is usually the prospect of a reward or punishment
• Influences decisions heavily because it affects marginal costs and benefits o Everyone benefits from trade
• Specialization is much more efficient than producing all necessary goods alone
• It is therefore more efficient to specialize in producing a certain good and then trading the excess for all other necessities o Market economies are the best way to organize economic activity
• Decisions of firms and households drive the economy to be more efficient
• Individual decisions are selfish but
• Economics o Study of how societies manage their scarce resources
• Ten Principles of Economics o People face tradeoffs
• Making decisions involves trading off one goal for another
Example: In order to study properly for a final exam, students must give up most of their social life during exams
• Societies face the tradeoff between efficiency and equity
An efficient society gets the most it can from its scarce resources
An equitable society distributes the benefits of its resources fairly amongst its members
To achieve one goal completely, society must give up the other
• Example: Welfare increases equity, but decreases efficiency (higher unemployment) o Cost of a decision/goal is what was given up to achieve it
• Known as opportunity cost
• Good decisions are made by taking opportunity cost into account o Rational people think at the margin
• Rational people know that decisions are not black and white
• By comparing the marginal benefit of a decision to the marginal cost, individuals make marginal changes to an already existing plan of action
• Example: Water vs. Diamonds
Diamonds are more expensive because the marginal benefit of an additional cup of water is small due to the abundance of water, and the marginal benefit of an additional diamond is high because of the scarcity of diamonds o People respond to incentives
• Incentive is something that induces a person to act
Is usually the prospect of a reward or punishment
• Influences decisions heavily because it affects marginal costs and benefits o Everyone benefits from trade
• Specialization is much more efficient than producing all necessary goods alone
• It is therefore more efficient to specialize in producing a certain good and then trading the excess for all other necessities o Market economies are the best way to organize economic activity
• Decisions of firms and households drive the economy to be more efficient
• Individual decisions are selfish but