Macro Notes 1.docx - Objective 1 Most of economics involves...

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Objective 1 Most of economics involves analyzing what happens in markets. A market is a place where buy- ers and sellers exchange goods and services. A market for a good or service could be local, re- gional, national, or global, but business in that market can be conducted just about anywhere –  even on the internet. E-bay is a great example of a global market. Throughout this course we will study how people make choices and behave in markets. There are three important ideas that will continually resurface in economics. People are rational. People respond to economic incentives. Optimal decisions are made at the margin. People are rational. Economists assume that people are rational, meaning an individual will weigh the benefits and costs of each action. It is also assumed that an individual will only choose a course of action when the benefits outweigh the costs. People respond to economic incentives. People act from a variety of motives such as insecurity, the need to please others, jealousy, love, anger, or fear, but economists know that people also act or respond to economic incentives. Optimal decisions are made at the margin. Since resources are scarce and we cannot have everything that we want, difficult choices must be made. The concept of opportunity cost reminds us that every time we make a choice, something else must be given up. Economics provides us with a set of tools that can help us to make better choices. Often times, the best decision is made by weighing the marginal benefits against the marginal costs. Marginal means an extra or additional benefit or cost of a decision. Marginal Benefit is the benefit received when one more unit is consumed or produced. For ex- ample, the marginal benefit of eating a second Popsicle is the additional satisfaction you gain. Marginal Costs are the change in a firm s total cost from producing one more unit of a good or service. Read the following article by Robert Murphy (opens in a new page) that explains what it means to act on the margin. ”  Particularly focus on the sections titled The Water-Diamond Paradox and Teachers versus Athletes . It will help illustrate the importance of decision making at the margin. Marginal analysis is a type of analysis that involves comparing marginal benefits and marginal costs. In economics it is reasoned that the optimal decision is to continue any activity up to the point where marginal benefit equals the marginal cost. MB=MC.
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