ch1 - Chapter 1 Monday, June 21 COURSE OBJECTIVES 1. To...

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Chapter 1 Monday, June 21
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COURSE OBJECTIVES 1. To become familiar with basic microeconomic theory 2. To prepare for future work in economics 3. To understand economic policy, and policy debates, in the context of economic theory 4. To facilitate critical and creative thinking in economic theory and policy
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KEY CONCEPTS IN CHAPTER 1 1. SCARCITY PRINCIPLE 2. COST-BENEFIT PRINCIPLE 3. ECONOMIC SURPLUS 4. OPPORTUNITY COST 5. THINKING AT THE MARGIN
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1. SCARCITY PRINCIPLE Life is full of tradeoffs. .. Example: Time tradeoffs: sleep vs. work vs. friends vs. dating vs. exercise vs. TV, video games, etc. Example: Leisure vs. income tradeoff: More leisure and less income, or more income and less leisure Example: More coal & oil use now, or reducing global warming in the long run
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2. COST-BENEFIT PRINCIPLE Axiom: One should take an action if and only if its benefits outweigh its costs. Example: If you take a part-time job, you will gain $150 per week, and lose 10 hours of leisure or study time. You should take the job if and only if the extra money is worth more to you than the extra time. Example: Creating a new park in an empty lot costs $5000 . There are 200 people in the neighborhood, and each person would be willing to pay $40 to have the park. Since the benefits (200 × $40 = $8000 ) outweigh the costs ( $5000 ), the park should be built.
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3. ECONOMIC SURPLUS Definition: Economic surplus = benefits - costs Economic surplus experienced by consumers is often called consumer surplus . Economic surplus experienced by producers is often called producer surplus . Example: I’m willing to pay $5000 for a particular car, but the seller is only asking for $3200 . My consumer surplus is $1800 . Example: It costs me $3 to make a trinket, and I sell it for $10 . My producer surplus for the trinket is $7 .
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QUESTION 1 (consumer surplus) I’m willing to pay $20 to watch a movie, but it only costs $9 . How much is my consumer surplus? A) $20 B) $15 C) $11 D) $9 E) $5
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answer to question 1 I’m willing to pay $20 to watch a movie, but it only costs $9 . How much is my consumer surplus? A) $20 B) $15 C) $11 D) $9 E) $5 Surplus = benefit cost = $20 $9 = $11
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QUESTION 2 (producer surplus) Each wallet that I make costs me $1 , but I sell them for $5 each. I sell 50 wallets. How much is my total producer surplus? A) $1 B) $5 C) $100 D) $200 E) $250
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answer to question 2 Each wallet that I make costs me $1 , but I sell them for $5 each. I sell 50 wallets. How much is my total producer surplus? A) $1 B) $5 C) $100 D) $200 E) $250 Surplus = benefit cost = 50 × $5 50 × $1 = $200
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4. OPPORTUNITY COST Definition: A comprehensive definition of economic cost, that includes implicit costs as well as explicit costs . Explicit cost : The more obvious kind of cost, like an actual payment that you make to someone to get something. Implicit cost : The less obvious kind of cost, like an opportunity that you give up to get something.
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OPPORTUNITY COST: Example 1 There are 200 people in the neighborhood, and each person would be willing to pay $40 to have the park.
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This note was uploaded on 08/03/2010 for the course ECON 1 taught by Professor Bergstrom during the Summer '07 term at UCSB.

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ch1 - Chapter 1 Monday, June 21 COURSE OBJECTIVES 1. To...

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