chapternotes - Principle #1: people face trade-offs and...

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Principle #1: people face trade-offs and choices. To get one thing, we give up another Principle #2: marginal people think at the margin. Marginal changes are small, incremental adjustments to an existing plan of action. Principle #3: people respond to incentives. Sunk costs cannot be recovered and our irrelevant to our decision making. We must make choices because we live in a world of scarcity , our wants are unlimited but our resources are limited. Therefore, we must make choices about how to use these resources. Economics is the study of the choices consumers, business managers and government officials make to attain their goals given their scarce resources Economic models are simplified versions of reality used to analyze real world economic situations Market is a group of buyers and sellers of a good and the ways in which they are arranged with firms in order to trade People are rational: consumers and firms use what they know to make good choices; also choose actions where the benefits outweigh the costs Consumers respond to economic incentives Some choices are all or nothing, but most aren’t. This is why choices are made at the margin : an extra benefit or cost of a choice. An optimal choice is one where the marginal benefit is equal to the marginal cost, represented by MB=MC. Figuring this out is called marginal analysis Trade-offs : the production of one good or service means producing less of another good or service Opportunity cost : highest valued alternative that must be given up to engage in that activity Efficiency : when we get the most out of scarce resources. Productive efficiency is when a good or service is produced at the lowest possible cost and allocative efficiency is when production is in accordance with consumer preferences; goods or services are produced such that the marginal benefit to society is equal to the marginal cost of producing them Centrally planned economy : the government decides how economic resources will be allocated Market economy : households and firms interacting in markets allocate economic resources Mixed economy : mostly market economy but with some government allocation of resources Voluntary exchange : both the buyer and the seller are better off by the transaction Equity : the fair distribution of economic benefits. There is a trade-off between equity and efficiency Economic theory/model : these make analyzing situations explicable so that individuals, firms and government can use them to make choices o Decide the assumptions to be used in developing the model; here, behavioral assumptions are made about motives of consumers and firms
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o Formulate hypothesis (statement that can either be correct or incorrect about an economic variable.) economic variable: something measured that can vary, like wages o Use economic data to test the hypothesis o Revise the model if it fails to explain economic data o
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This note was uploaded on 02/27/2010 for the course ECON 101 taught by Professor Ganley during the Fall '06 term at SUNY Geneseo.

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chapternotes - Principle #1: people face trade-offs and...

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