02 Basics

02 Basics - Basics Economics 101 Alan C. Marco Economics in...

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Unformatted text preview: Basics Economics 101 Alan C. Marco Economics in a nutshell Prices! Economics 101 Alan C. Marco 1972 Ferrari Dino Brad (seller) values the car at $50,000 Angelina (buyer) values the car at $70,000 What’s a fair price? What price would you expect? What if Jennifer also values the car at $70,000? What if 100 buyers value the car at $70,000? There you have it: market power, monopoly, and There competition. competition. Economics 101 Alan C. Marco Economics Microeconomics Studies individual decision makers Firms, consumers, markets Strategic interaction How do those decisions aggregate? How does it lead to economic growth? Macroeconomics Economics 101 Alan C. Marco The scope of microeconomics Firms Price Production: quantity, quality (crimping), inputs Others: investment, R&D, bundling, location How much at what price? Location (how “far”)? Labor vs. Leisure Consumers Economics 101 Alan C. Marco The scope of microeconomics Politics: lobbying, campaigning, voting Criminal behavior Crowd behavior: traffic, concerts Corporate governance Football: David Romer and Bill Belichik Economics 101 Alan C. Marco Decision making or “constrained optimization” C o n s u m e rs M a x im iz e U t ilit y In c o m e P re fe re n c e s P r ic e s H o w m u c h to b u y? DEMAND D e c is io n m a k e r P r o b le m C o n s t r a in ts P ro d u c e rs M a x im iz e P r o f its T e c h n o lo g y In p u ts P r ic e s H o w m u c h to m a k e ? S U P P LY D e c is io n Economics 101 Alan C. Marco Economic decision-making Decisions are only interesting if: They are costly Things are scarce That is, decisions involve trade-offs Economics is the study of how people make Economics choices under conditions of scarcity and of the results of those choices for society results Everyone faces scarcity Alan C. Marco Economics 101 People Are Rational Economists assume that people are rational--that Economists rational they try to fulfill their goals as best they can they We at least think of them as self-interested. Are criminals rational? Self-interested? 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 If prices, do you ever buy the expensive one? prices, You’re in a restaurant looking at the menu---are you able You’re to order? to Economics 101 Alan C. Marco “At the margin” Marginal Benefit The increase in total benefit that results from carrying The out one additional unit of the activity out The increase in total cost that results from carrying out The one additional unit of the activity one Marginal Cost Economics 101 Alan C. Marco Costs Actual expenditures Opportunity costs What’s the opportunity cost of going to Vassar? Economics 101 Alan C. Marco Costs: Opportunity Cost Opportunity Cost: The value of the next-best Opportunity alternative that must be forgone in order to undertake an activity undertake Decisions depend upon opportunity costs It is not the combined value of all other forgone It activities, just the next best one activities, The opportunity cost of picking up the $100 bill is The whatever else he would spend his time doing whatever Alan C. Marco Bill Gates’ time is scarce Economics 101 Economic Surplus The benefit of taking an action minus its cost Economic Surplus = Benefit - Cost Rational decision makers take all actions that yield a Rational positive economic surplus positive Economics 101 Alan C. Marco Cost-Benefit Principle Take an action if, and only if, the extra benefits Take from taking the action are at least as great as the extra costs extra Measuring the costs and benefits is often difficult One may have to use assumptions Economics 101 Alan C. Marco Optimal Level If the marginal benefit is greater than marginal If cost cost Increase output If the marginal benefit is less than the marginal If cost cost Decrease output Optimal output is where marginal benefit equals Optimal marginal cost marginal MB = MC Alan C. Marco Economics 101 Are people rational? Rational people will apply the cost-benefit Rational principle using their intuition principle However, people can make mistakes when However, weighing the costs and benefits weighing People often make inconsistent choices 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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