02 Basics

02 Basics - Economics in a nutshell Prices Economics 101...

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Unformatted text preview: Economics in a nutshell Prices! Economics 101 Alan C. Marco 1972 Ferrari Dino Brad (seller) values the car at $50,000 Brad Angelina (buyer) values the car at $70,000 Angelina What’s a fair price? What price would you expect? What What if Jennifer also values the car at $70,000? What What if 100 buyers value the car at $70,000? What There you have it: market power, monopoly, and competition. competition. Economics 101 Alan C. Marco Economics Microeconomics Microeconomics Studies individual decision makers Studies Firms, consumers, markets Firms, Strategic interaction Strategic Macroeconomics Macroeconomics How do those decisions aggregate? How How does it lead to economic growth? How Economics 101 Alan C. Marco The scope of microeconomics Firms Firms Price Price Production: quantity, quality (crimping), inputs Production: Others: investment, R&D, bundling, location Others: Consumers Consumers How much at what price? How Location (how “far”)? Labor vs. Leisure Labor Economics 101 Alan C. Marco The scope of microeconomics Politics: lobbying, campaigning, voting Politics: Criminal behavior Criminal Crowd behavior: traffic, concerts Crowd Corporate governance Corporate Football: David Romer and Bill Belichik Romer and Belichik Economics 101 Alan C. Marco Decision making or “constrained optimization” Consum ers De cisio n m a ker Producers Ma xim ize Utility Problem Constraints Ma xim ize P ro fits In come Preferences Prices Te ch no lo gy In pu ts Prices Ho w m u ch to b u y? De cision Ho w m u ch to ma ke? DE MA N D SUPPLY Economics 101 Alan C. Marco Economic decision-making Decisions are only interesting if: Decisions They are costly They Things are scarce Things That is, decisions involve trade-offs That Economics is the study of how people make choices under conditions of scarcity and of the results of those choices for society results Everyone faces scarcity Everyone Economics 101 Alan C. Marco People Are Rational Economists assume that people are rational--that rational they try to fulfill their goals as best they can We at least think of them as self-interested. We Are criminals rational? Are Self-interested? Self Economics 101 Alan C. Marco Are people rational? Everyday situations Do you leave the store and immediately wish you hadn’t Do bought what’s in your cart? bought If two identical pairs of shoes are marked with different prices, do you ever buy the expensive one? prices, You’re in a restaurant looking at the menu---are you able You are to order? to Economics 101 Alan C. Marco “At the margin” Marginal Benefit Marginal The increase in total benefit that results from carrying out one additional unit of the activity out Marginal Cost Marginal The increase in total cost that results from carrying out one additional unit of the activity one Economics 101 Alan C. Marco Costs Actual expenditures Actual Opportunity costs Opportunity What’s the opportunity cost of going to Vassar? What Economics 101 Alan C. Marco Costs: Opportunity Cost Opportunity Cost: The value of the next-best Opportunity best alternative that must be forgone in order to undertake an activity undertake Decisions depend upon opportunity costs Decisions It is not the combined value of all other forgone activities, just the next best one activities, Bill Gates’ time is scarce Bill The opportunity cost of picking up the $100 bill is whatever else he would spend his time doing whatever Economics 101 Alan C. Marco Economic Surplus The benefit of taking an action minus its cost The Economic Surplus = Benefit - Cost Rational decision makers take all actions that yield a positive economic surplus positive Economics 101 Alan C. Marco Cost-Benefit Principle Take an action if, and only if, the extra benefits from taking the action are at least as great as the extra costs extra Measuring the costs and benefits is often difficult Measuring One may have to use assumptions One Economics 101 Alan C. Marco Optimal Level If the marginal benefit is greater than marginal cost cost Increase output Increase If the marginal benefit is less than the marginal cost cost Decrease output Decrease Optimal output is where marginal benefit equals marginal cost marginal MB = MC MB Economics 101 Alan C. Marco Are people rational? Rational people will apply the cost-benefit Rational benefit principle using their intuition principle However, people can make mistakes when weighing the costs and benefits weighing People often make inconsistent choices People Economics 101 Alan C. Marco ...
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This note was uploaded on 04/26/2010 for the course ECON 101 taught by Professor Staff during the Spring '08 term at Vassar.

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