Lecture_1 - Economics 102 Lecture 1: A Quick Review In this...

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1 Economics 102 Lecture 1 : A Quick Review LECTURE 3 MEASURING INCOME 1 In this lecture, look for the answers to these questions: § What are the principles of how people make decisions? § What are the principles of how people interact? § What are the principles of how the economy as a whole works? § What are economists ’ two roles? How do they differ? § What are models? How do economists use models? § What is the difference between microeconomics and macroeconomics? LECTURE 3 MEASURING INCOME 2 What Economics Is All About § Scarcity refers to the limited nature of society’s resources. § Economics is the study of how society manages its scarce resources, including how people decide how much to work, save, and spend, and what to buy how firms decide how much to produce, how many workers to hire how society decides how to divide its resources between national defense, consumer goods, protecting the environment, and other purposes
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2 LECTURE 3 MEASURING INCOME 3 10 Principles of Economics § First four deal with how people make decisions. § The next three deal with how people interact. § The final three deal with how the economy as a whole works. LECTURE 3 MEASURING INCOME 4 HOW PEOPLE MAKE DECISIONS § Decision making is at the heart of economics. § The first four principles deal with how people make decisions. LECTURE 3 MEASURING INCOME 5 HOW PEOPLE MAKE DECISIONS All decisions involve tradeoffs. Examples: § Going to a party the night before your exam leaves less time for studying. § Having more money to buy stuff requires working longer hours, which leaves less time for leisure. § Protecting the environment requires resources that might otherwise be used to produce consumer goods. Principle #1: People Face Tradeoffs
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3 LECTURE 3 MEASURING INCOME 6 HOW PEOPLE MAKE DECISIONS § Society faces an important tradeoff: efficiency vs. equity § efficiency : getting the most out of scarce resources § equity : distributing prosperity fairly among society’s members § Tradeoff: To increase equity, we can redistribute income from the well-off to the poor. But this reduces the incentive to work and produce, and shrinks the size of the economic “pie.” Principle #1: People Face Tradeoffs LECTURE 3 MEASURING INCOME 7 HOW PEOPLE MAKE DECISIONS § Thinking about a choice as a tradeoff emphasizes cost as an opportunity foregone. § The opportunity cost of any choice is the value of the best alternative given up to obtain it. § Opportunity cost is the relevant cost for decision making. Principle #2: The Cost of Something Is What You Give Up to Get It LECTURE 3 MEASURING INCOME 8 HOW PEOPLE MAKE DECISIONS Examples: The opportunity cost of… …going to college for a year is not just the alternatives to tuition, books, and fees, but also the foregone wages.
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This note was uploaded on 04/02/2008 for the course ECON 102 taught by Professor Rossana during the Fall '08 term at University of Michigan.

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Lecture_1 - Economics 102 Lecture 1: A Quick Review In this...

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