ECO 202 Notes - LESSON 1 1 Three Basic Economic...

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LESSON 1 1/ Three Basic Economic Questions: -Economics is the study of the choices people make to cope with scarcity. -Scarcity is the reason why we make decisions. -Scarcity occurs when we have unlimited wants but limited resources. -Everyone faces scarcity because we want more than what the available resources can provide to satisfy us. -Economists are interested in studying how choices end up determining what, how, and for whom goods and services are produced. Goods are objects that satisfy our wants like burgers, and DVD players. Services are actions that satisfy our wants, like haircuts and rock concerts. -3 Basic Economic Questions: o What? Determines the quantities of the goods and services produced. o How? How are goods and services produced? o For whom? For whom are goods and services produced? -Popular Topics that heated debates: o Financial crisis and global downturn o Globalization and outsourcing o The information-age economy o Depletion of rainforests and fish-stocks o Water shortages o Social security crisis o Global climate change 2/ Three Main Ideas of Economics -5 core ideas summarize the economic way of thinking about the choices that must be made to cope with scarcity: o Rationality People make rational choices by comparing costs and benefits. o Cost Cost is what must be given up to get something. o Benefit Benefit is what is gained when you get something. o Margins A rational choice is made on the margin. o Incentive Choices respond to incentives. -Rational Choice Uses the available resources to most effectively satisfy the wants of the person making the choice. Compares costs and benefit and these choices are made on the margin. Answers the first economic question: What goods and services will get produced? Those goods and services that people rationally choose to buy. -Cost Is a lost opportunity or opportunity cost, which is the best thing we must give up when we choose to do something.
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There might be many alternatives that we give up, but there is only one best (or highest-valued) alternative. -Benefit Economists measure the benefit of something by what a person is willing to give up in order to get it. -Margin Making choices on the margin means comparing all the relevant alternatives systematically and incrementally. The marginal cost of an activity is what you must give up in order to get one additional unit of it. The marginal benefit of an activity is what you are willing to give up in order to get one additional unit of it. Marginal Benefit Marginal Cost Choices are rational. -Incentives Changes in marginal benefit and marginal cost affect the incentives that we face. An incentive can either be a reward or a penalty that affects our decision.
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