Economics 1

Economics 1 - Economics 1 ← Economics is the social...

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Unformatted text preview: Economics 1 ← Economics is the social science concerned with the efficient use of limited or scarce resources to achieve max. satisfaction of human materials and wants • Means to satisfy wants are limited, even though we have unlimited desire for goods and services o Called the economizing problem ← ← Economizing problem: • What can we obtain? o “Menu” of options available • How will we choose? o How will we make a choice from the menu of things we can pick? What criteria? • What will we choose? ← ← What are the costs and benefits (tradeoffs) of a particular action? • To produce more of one thing you need to produce less of another ← ← Set of goods that you can obtain is called an opportunity set ← ← Q = quantity ← P = price ← ← Alice has $100 to spend on CDs and books. The price of a CD is $10 and the price of a book is $20. ← Q Book ∙P Book + Q CD ∙P CD =$100 ← ← ← ← Budget constrains change and move outward along the x axis with price changes ← ← Opportunity cost: what we give up or forgo when we make a decision or choice ← ← Cost of Dartmouth education • Actual $ amount (tuition, books, etc) • Opportunity cost: you could be working or enjoying yourself ← Tradeoff: Great education & better job after Dartmouth ← ← Rational Behavior • Acting in a self interested fashion which reaps the best net benefits o Net Benefits = Total Benefits – Total Costs ← ← Maximizing Profit • Profit = Revenue – Costs o Revenue = (price)(quantity) o Costs = (per unit cost)(quantity) ← ← Costs are not limited to financial transactions in economics • If something makes you feel bad, that is a cost o If good, it is a benefit ← ← Economists like to assign a monetary value on costs and benefits in order to compare the two • Sometimes difficult • Perceived benefits might be subjective o Smoking makes you feel good ← ← Sunk Costs • Nonrecoverable expenditures o Setup costs for a factory o Installation charge to turn on electricity is a sunk cost ← ← Incentives • Rewards and costs that stem from making choices • Prices reflect incentives: rewards and costs • All decision makers (consumers, businesses, govt’s, etc.) respond to incentives ← ← Marginal benefits • Difference between the value of benefits ← ← Private vs. Social Benefits • Because your actions may have an effect on other people o Pollution from a factory may impose a larger cost the closer an individual lives to the factory, while the factory itself may bear no cost for the cause of production • An activity may benefit some while imposing a cost on others...
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Economics 1 - Economics 1 ← Economics is the social...

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