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Unformatted text preview: 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. 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 persons 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 benefit of that an extra unit of the good would yield....
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- Fall '06