Chapter_1 - The higher the opportunity cost of doing...

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Chapter 1 What Economics Is About
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• Economics is about almost everything. Economic analysis can be usefully applied to the process of decision- making. Microeconomics deals with consumers, workers, and firms. Macroeconomics focuses on the broader economic issues confronting the nation.
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Economic Definitions • Scarcity is the condition in which our wants are greater than the limited resources available to satisfy them. • Economics is the science of scarcity; or how individuals and societies allocate limited resources to satisfy many wants.
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Opportunity Cost We encounter an OC whenever we make a choice among alternatives OC is the most highly valued opportunity or alternative forfeited when a choice is made. Examples: 1. Attending school for higher education vs starting to work early. OC: salary. 2. Investing money in the bank vs spending it. OC: goods you can buy. 3. Spending money vs investing it in the bank. OC: rate of interest you could have earned.
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Unformatted text preview: The higher the opportunity cost of doing something, the less likely it will be done. Rational Behavior Rational Behavior requires a comparison of marginal benefits and marginal costs Marginal costs are always upward sloping Example: Production activities of a firm (a) Organizational costs increase as firm size grows. (b) Technology costs increase as more of a product is produced. Marginal Benefits are always downward sloping Example: Consuming Pizza Based on the Law of Diminishing Marginal Utility Efficiency Decisions to allocate limited resources to competing needs are made by following the equi-marginal rule: marginal benefit = marginal cost Diagrammatic representation At Q L , MB > MC. Hence production/consumption will increase till it reaches Q*. At Q H , MC > MB. Hence, production/consumption will decrease till it reaches Q*. Q* is optimum or efficient. It denotes a state of equilibrium....
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Chapter_1 - The higher the opportunity cost of doing...

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