WI 2009_-_Economics

WI 2009_-_Economics - Economics We learn economic due to...

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Economics January 07, 2009 We learn economic due to scarcity (limited resources) need to make choices and have trade-offs Scarcity principle : there’s boundless needs and wants, resources are limited having more of one thing means having less of another thing How do people make choices? o Cost-benefit principle : an action should be taken if the extra benefit of that action are at least as great as the extra costs Example : airline safety Amount of airline safety is due to cost Example : crime rate 0% crime rates means an increase in police force and that means an increase in tax Example Activity = x = driving to target Extra cost of doing x vs. extra benefit of doing x Alarm clock $20 at bookstore $10 at target Extra benefit - $10 (what is saved) Extra cost - time, gas, safety - how to quantize these ? Think of the minimum amount one would pay someone to do the activity o Suppose the extra cost is $8.
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Therefore, the economic surplus : the difference between extra benefits and extra cost of doing the action o Economic surplus = extra benefit - extra cost = $10 - $8 = $2 January 9, 2009 Economist agents are rational : their objective is to make benefits through certain goals Example : cost-benefit principle o One listens to a CD, but there are 2 songs that one hates. However, one is comfortably seated and does not want to stand up and skip the songs o Action : getting off the chair to skip the tracks o Benefit : skip the unwanted songs * quantized ($): how much would one pay someone to do it? - it is the maximum amount paid to someone to do the action o Cost : getting off the chair - lost of comfort * quantized ($): the minimum amount that someone would have to pay you to do it o Benefit > cost - do the action Benefit < cost - do not do the action Opportunity cost : of an action is the value of the next best alternative foregone when one takes the action o It is the true cost of an action that is measured by what one have to give up to do it o Example : Typical situation Paul wants to go to next week football game. Explicit cost - ticket - $100
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- transportation - $20 - time - $ - Need to quantized! The time could be used to watch TV, babysit to make money. Let’s give it a value of $100. o Example : Suppose one won a ticket to see a concert, but there is also a concert that one wants to see instead; Eric Clapton - free ticket; Bob Dylan - performance worth - $50, actual cost of the ticket - $40 What is the opportunity cost of attending the Clapton concert (what is the value of Dylan’s concert to one)? $10 $50 - $40 = $10 Obstacles to making good decisions : 1. Measuring costs and benefits as proportions rather than absolute dollar amounts o Example Buying a microwave At the bookstore - $100; At Fry’s - $50 Benefit of driving to Fry’s - $50 Buying a laptop At the bookstore - $2,250; At Fry’s - 2,200 Benefit of driving to Fry’s - $50
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This note was uploaded on 10/19/2009 for the course ECON ECON 1 taught by Professor Foster during the Spring '08 term at UCSD.

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WI 2009_-_Economics - Economics We learn economic due to...

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