Econ1013 CHAPTER 1 First Principles of Microeconomics

Econ1013 CHAPTER 1 First Principles of Microeconomics -...

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ECONOMICS 1013 (FA2010) Econ 1013 – September 10, 2010 First Principles Of Microeconomics Economics : The study of how people make decisions when wants are unlimited and resources are scarce. Microeconomics : The branch of economics that studies how individuals make decisions and how these decisions interact. Focus on the actions of individual agents, such as firms and consumers Macroeconomics : The branch of economics that is concerned with overall ups and downs in the economy. Focus on the structure and behavior of the entire economy What You Will Learn in this Chapter: A set of principles for understanding the economics of how individuals make choices: - Scarcity - Opportunity cost - Trade-offs - Marginal analysis A set of principles for understanding the economics of how individual choices interact: - Trade - Equilibrium - Efficiency and equity Individual Choice Individual choice: - what to do. - what not to do. There are 4 basic principles of theory of individual choice: 1. Scarcity: Resources are scarce A resource: anything that can be used to produce something else. Resources are scarce, there is not enough available to satisfy all productive uses. Ex: Land, labour, capital, human capital. 2. Opportunity Cost: The real cost of something is what you must give up to get it. The real cost of something is its opportunity cost: what you must give up in order to get it. All costs are ultimately opportunity costs. Ex: What’s the cost of attending this economics class? Take an economics course, can’t take some other course. Ex: What’s the cost of going to university? Go to university; forgo the income one could have made if he/she had worked instead. 3. Trade-Offs: How much? A decision at the margin Making a trade-off: comparing the costs with the benefits of doing something. Decisions about whether to do a bit more or a bit less of an activity are ‘marginal’ decisions. Marginal Analysis : Making trade-offs at the margin: comparing the costs and benefits of doing a little bit more of an activity versus doing a little bit less. Marginal Analysis is the study of such decisions. Ex: Hire one more worker? Ex: Study one more hour? 1/2 fish 4/3 fish ne  2 coconuts 3/4 coconut e fish Opportunity  Opportunity 
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Ex: Eat one more cookie? 4. Incentives: People take advantage of opportunities to make themselves better off People respond to incentives to change their behaviour. Economists can try to measure people’s responsiveness to changes in incentives. Ex.: Price of gasoline rises people buy more fuel-efficient cars. Ex: If earnings of university graduates rise more people will try to get university degrees. Ex: Offering cash bonuses to student getting high grades in Florida schools student performance substantially improved Ex: Offering baby bonuses in Quebec Fertility rate increased by 12%. Interaction: How Economies Work
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This note was uploaded on 11/02/2010 for the course ECON 1013 taught by Professor Carr during the Spring '10 term at University of Toronto- Toronto.

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Econ1013 CHAPTER 1 First Principles of Microeconomics -...

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