Chapters 1, 2, 20 - Week 1 Chapters 1 2 and 20 3:12:00 PM...

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Week 1- Chapters 1, 2, and 20 16/09/2007 15:12:00 The management of societies resources is important because resources are  scarce. A society cannot give every individual the highest standard of living of which he  or she might aspire. scarcity:  the limited nature of societies resources Economics:  the study of how society manages its scarce resources o Recources are allocated by the action of millions of households and  firms, thus economists study how there people make decisions- how  much they  work , what they  buy , how much they  save  and how they  invest savings.  An economy is a group of people interacting as they go about their daily lives.  Ten Principles of Economics HOW PPL MAKE DECISIONS 1. People face tradeoffs. Ex: the tradeoff bw efficiency and equity Efficiency:  the property of society getting the most it can from its scarce  resources.  Equity:  the property of distributing economic prosperity fairly among the  members of society.  o Welfare and unemployment insurance aims to achieve equity. But this  is at the expense of efficiency bc these programs reduce the reward for  working hard, thus ppl work less and produce fewer goods and  services.  o When the govnt trie to cut the pie into more = slices, the pie gets  smaller.  2. The cost of something is what you give up to get it. Ex: your time, money.  Opportunity Cost:  whatever must be given up to get the item. Ex: the  opportunity cost of athletes going to college is very high because they give up  the millions they could be making playing professional sports.  o Opportinity cost-  that of college athletes is high because they give up  millions they oculd be making professionally.  
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3. Rational people think at the margin Rational people:  people who systematically an purposefully do the best they  can to achieve their objectives. Ex: how many workers do you hire and how  much do you produce to maximize profits? people think in terms of  marginal costs  and  benefits.  Marginal changes:  small   incremental adjustments to a plan of action The marginal cost of selling a $500 seat on an airplane for $300 is only the  cost of peanuts and beverage because that seat would otherwise be empty. A  rational decision maker takes action if the marginal benefit exceeds the  marginal cost. $300 for an empty seat vs $1 for peanuts and water. Marginal  benefit, $300, exceeds marginal cost So a person’s willingness to pay for any good is based on the marginal  benefit of that an extra unit of the good would yield. Because water is so  abundant, 1 more cup is insignificant. But because diamonds are so rare, the 
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