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Econ_2030-test1 - Econ 2030 Test 1 I What Economics Is...

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Econ 2030- Test 1 I. What Economics Is economics : the study of how human beings coordinate their wants and desires, given the decision-making mechanisms, social customs, and political realities of the society. Key words: coordination 3 central problems facing any economy: 1. What & how much to produce 2. How to produce it. 3. For whom to produce it for Problem of scarcity : goods available are too few to satisfy individuals’ desires. 2 elements of scarcity : our wants and our means of fulfilling those wants Quantity of goods, services, and usable resources depends on technology and human action, which underlie production. Economy deals with scarcity by coercion . Coordination involved some type of coercion- limiting the wants of people and increasing the amount of work people want to do. II. A Guide to Economic Reasoning Think like an economist: address almost all issues using a cost/benefit approach Focus on important questions and create a simple model, then collect empirical evidence and “test” the model to see if it fits. Economic Reasoning : how to think like an economist, making decisions on the basis of costs and benefits. Provides a framework within which to approach a question. People do what is in their best interest financially – rely on cost/benefit analysis to make decisions III. Marginal Costs and Marginal Benefits Relevant costs and relevant benefits: expected incremental or additional costs incurred and the expected incremental benefits that result from a decision. Marginal cost : additional cost to you over and above the costs you have already incurred. Sunk Costs : costs that have already been incurred and cannot be recovered. Marginal benefit : additional benefit above what you’ve already derived. - ex: m.b. of this chapter is additional knowledge you get from reading it, if you already knew everything in the book- the marg. ben. would be zero. Economic Decision Rule : - if marginal benefits of doing something exceed the marginal costs- do it! - If marginal costs of doing something exceed the marginal benefits- don’t do it.
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IV. Economics & Passion Reasoning leads to a better society for the majority of people - ex: providing a job for every person who wants one might not be a worthwhile policy goal if it means that doing so will reduce the ability of an economy to adapt to new technologies. V. Opportunity Cost opportunity cost: benefit that you might have gained from choosing the next- best alternative. The value of that next-best alternative More time you spend on one activity, the less time you have for another – that is opportunity cost. - ex: gun vs. butter debate- resources are limited, society decides to produce more guns, which means will have less butter. So when society decides to spent $50 bill. more on health care, the opportunity cost of that decision is $50 billion not spent on helping homeless, paying off national debt or national defense.
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Econ_2030-test1 - Econ 2030 Test 1 I What Economics Is...

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