Lecture 2

Lecture 2 - ECON 1/14/09 Chapter 1 The Way Economists Think...

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ECON 1/14/09 Chapter 1 The Way Economists Think Marginal cost - taking your first shot Marginal benefit – the buzz If benefits outweigh the costs, you are going to take the shot. This is called a rational choice. Example: firm wants to buy a new machine. Benefit – increased productivity. Cost – How do we respond to incentives? Example: fiscal stimulus package. Trying to spend money & change policies to bring economy back. One way is to use incentives: We can give you a tax break if you invest. Economist’s Problem I want to show in retrospect that we made a good decision. The problem is lots of things are going on in the world so we don’t know if it was just that one factor. How do we isolate factors? Example: consumer sentiment (how happy people are) it’s hard to isolate the factors that caused change in how happy people are Ceteris paribus “other things being equal” You want to only change one variable at a time to isolate the factor creating the change. How do they do that though?
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Lecture 2 - ECON 1/14/09 Chapter 1 The Way Economists Think...

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