chap1 - Chapter 1: Thinking Like an Economist Scarcity is a...

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Chapter 1: Thinking Like an Economist Scarcity is a fundamental fact of life Wants and needs are boundless Therefore, we have to choose among competing alternatives and face trade-offs Almost every choice you’ve made is made because something is scarce
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The Scarcity Principle You buy a Ford instead of a Chevy because you don’t have money for both (money is scarce) You eat one slice of pizza instead of one whole pizza because your stomach capacity is scarce You drive 65 instead of 55 to see your girlfriend because your time together is scarce The scarcity principle: Although we have boundless needs, the resources available are limited. So having more of one good thing usually means having less of another
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Economics Defined Wants vs. Resources Choices Economics Economics: the study of how economic players (individuals, firms, governments) make choices in a world of scarcity and the results of those choices for society In a world free of scarcity, there will be no need for choices, and hence no need for economics Alas, such as a world does not exist
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The Cost-Benefit Principle Choices should be made based on this principle: An economic player should take an action iff the extra benefits from taking the action are at least at great as the extra costs: MB>=MC You should buy two slices of pizza instead of one iff the second slice brings you more than its cost. The MB of the second pizza is the incremental utility it brings to you, the MC is the price of the second slice
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Example 1: Optimal class size -- Assumption Two class sizes to choose: 200 and 20 -- Question Should the class size be reduced to 20 students? -- Answer Yes iff the benefit is larger than the cost -- But what are the benefits and costs? Benefit (better learning better job) increases from $300 to $1,800 per student, cost (more faculty, class rooms) increase from $200 to $2,200 per student
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-- Assumption A computer game $20 on campus but has $10 promotion in Smithhaven mall. -- Question Should you buy the computer game in the mall -- Answer Yes iff the cost of trip to the mall is less than $10 -- But what are the costs? The time and trouble it takes to make the trip but
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chap1 - Chapter 1: Thinking Like an Economist Scarcity is a...

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