notes - Ch 1 The Principles of Economics(plus 10 Principles...

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8/16/2010 Ch 1. The Principles of Economics (plus 10 Principles) What is economics- The study of how society allocates its SCARCE resources Scarcity— a product, resources that are limited in nature Others conditions for scarcity: society has to value it; (there are limited to wants and needs) Ex) Mona Lisa, Diamonds, water Top 10 principles People face tradeoffs Tradeoffs exist because of scarcity No such thing as a free lunch “to get one thing, you may have to give up another thing” Ex. “Guns and butter” The more we spend on “guns” to protect ourselves from aggressors, the less we spend on consumer goods Efficiency vs. Equality Equality —resources are allocated uniformly; “everyone gets a piece of the pie” Efficiency --Getting the most out of resources Ex. Tax on labor--taking money from the rich and give to the poor; allocating funds equally in order to share “the wealth” Problems with taxing labor? While equality may go up, efficiency goes down No incentive to work people work less which lowers output Side note: Equality= fairness (but fairness is subjective—what is fair to one person is not fair for another) Ex2) Universal Health Care vs. Non-universal health care
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Efficiency may go up; but the quality of care goes down The cost of something is what you give up to get it (what is it worth to you?) Opportunity cost—the foregone value from the best alternative given up Its involves time and money Can be ranked (foregone best thing you would do) Example1) What you want to do Ranking of choice Baseball 2 Study 3 Sleep 1 Note from example 1: Opportunity cost is the value of the best thing that you gave up, therefore the opportunity cost of sleeping is the fore gone value he placed on sleep. Ex. You pay $50 to attend a concert What is included in the opportunity cost? Time the foregone value from the next best thing you would do. Money foregone value from what we would have bought with the $50 Thus if you have saved the money, the $50 is the foregone value of interest Ex. Land values Land in new york city Swamp land in GA NYC has a higher opportunity cost! Can do Little to no opportunity cost
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more with NYC land. Better value Rational people think on the margin Margin—small incremental Example: Airline has 220 seats, the cost of 1 empty seat is $100,00…which is a loss to the company ; thus the Marginal cost = $0 if it sells But if it sells for $1, its better than not selling at all Side note: “think on the margin; margin cost” Marginal benefit= additional benefit Ex. Kroger, if the fish isn’t selling at $5. And it will expire in a week, its better to Drop the price, than to take a $5 loss People respond to incentives Ex. Don’t put my lecture notes on website= more incentive to come to class Ex. Seat belt laws marginal cost is gas and driving marginal benefit is to save time
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