Chapter 1 - chapter: 1 > FirstPrinciples 1 of 29 WHAT YOU...

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1 of 29 chapter: 1 >> First Principles
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2 of 29 WHAT YOU WILL LEARN IN THIS CHAPTER A set of principles for understanding the economics of how individuals make choices A set of principles for understanding how individual choices interact A set of principles for understanding economy-wide interactions
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3 of 29 Individual Choice Individual choice is the decision by an individual of what to do, which necessarily involves a decision of what not to do. Basic principles behind the individual choices: 1. Resources are scarce. 2. The real cost of something is what you must give up to get it. 3. “How much?” is a decision at the margin. 4. People usually take advantage of opportunities to make themselves better off.
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4 of 29 Resources Are Scarce A resource is anything that can be used to produce something else. Ex.: Land, labor, capital Resources are scarce – the quantity available isn’t large enough to satisfy all productive uses. Ex.: Petroleum, lumber, intelligence
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5 of 29 The Real Cost of Something Is What You Must Give Up to Get It The real cost of an item is its opportunity cost : what you must give up in order to get it. Opportunity cost is crucial to understanding individual choice: Ex.: The cost of attending the economics class is what you must give up to be in the classroom during the lecture. Sleep? Watching TV? Rock climbing? Work? All costs are ultimately opportunity costs.
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6 of 29 Opportunity Cost In fact, everybody thinks about opportunity cost. The bumper stickers that say “I would rather be … (fishing, golfing, swimming, etc…)” are referring to the “opportunity cost.” It is all about what you have to forgo to obtain your choice. I WOULD RATHER BE SURFING THE INTERNET
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FOR INQUIRING MINDS Got a Penny? At many cash registers there is a little basket full of pennies. People are encouraged to use the basket to round their purchases up or down. If it’s too small a sum to worry about, why calculate prices that exactly? Why do we have pennies? Sixty years ago, a penny was equivalent to 30 seconds worth of work—it was worth saving a penny if doing so took less than 30 seconds. But wages have risen along with overall prices, today a penny is therefore equivalent to just over 2 seconds of work—and so it’s not worth the opportunity cost of the time it takes to worry about a penny more or less. The rising opportunity cost of time in terms of money has turned a penny from a useful coin into a nuisance.
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8 of 29 “How Much?” Is a Decision at the Margin You make a trade-off when you compare 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 .
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9 of 29 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.
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This note was uploaded on 10/04/2011 for the course ECON 2006 at Virginia Tech.

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Chapter 1 - chapter: 1 > FirstPrinciples 1 of 29 WHAT YOU...

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