Lecture-09-06

Lecture-09-06 - Lecture 2: Introduction (Chapter 1 & 2)...

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Lecture 2: Introduction (Chapter 1 & 2)
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Today’s Topics Principles of Economics Principles of How People Make Decisions Principles of How People Interact Economists’ Approach to Study Economics
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The Principles of How People Make Decisions
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TEN PRINCIPLES OF ECONOMICS 4 HOW PEOPLE MAKE DECISIONS All decisions involve tradeoffs. Examples: Going to a party the night before your midterm leaves less time for studying. Having more money to buy stuff requires working longer hours, which leaves less time for leisure. Protecting the environment requires resources that could otherwise be used to produce consumer goods. Principle #1: People Face Tradeoffs Principle #1: People Face Tradeoffs
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TEN PRINCIPLES OF ECONOMICS 5 HOW PEOPLE MAKE DECISIONS Society faces an important tradeoff: efficiency vs. equality Efficiency : when society gets the most from its scarce resources Equality : when prosperity is distributed uniformly among society’s members Tradeoff: To achieve greater equality, could redistribute income from wealthy to poor. But this reduces incentive to work and produce, shrinks the size of the economic “pie.” Principle #1: People Face Tradeoffs Principle #1: People Face Tradeoffs
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TEN PRINCIPLES OF ECONOMICS 6 HOW PEOPLE MAKE DECISIONS Making decisions requires comparing the costs and benefits of alternative choices. The opportunity cost of any item is whatever must be given up to obtain it. It is the relevant cost for decision making. Principle #2: The Cost of Something Is What You Give Up to Get It Principle #2: The Cost of Something Is What You Give Up to Get It
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TEN PRINCIPLES OF ECONOMICS 7 HOW PEOPLE MAKE DECISIONS Examples: The opportunity cost of… …going to college for a year is not just the tuition, books, and fees, but also the foregone wages. …seeing a movie is not just the price of the ticket, but the value of the time you spend in the theater. Principle #2: The Cost of Something Is What You Give Up to Get It Principle #2: The Cost of Something Is What You Give Up to Get It
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TEN PRINCIPLES OF ECONOMICS 8 HOW PEOPLE MAKE DECISIONS Rational people systematically and purposefully do the best they can to achieve their objectives. make decisions by evaluating costs and benefits of marginal changes – incremental adjustments to an existing plan. Principle #3: Rational People Think at the Margin Principle #3: Rational People Think at the Margin
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TEN PRINCIPLES OF ECONOMICS 9 HOW PEOPLE MAKE DECISIONS Examples: When a student considers whether to go to college for an additional year, he compares the fees & foregone wages to the extra income he could earn with the extra year of education. When a manager considers whether to increase output, she compares the cost of the needed labor and materials to the extra revenue.
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This note was uploaded on 12/02/2011 for the course ECON ECON200 taught by Professor Songhualin during the Fall '11 term at Maryland.

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Lecture-09-06 - Lecture 2: Introduction (Chapter 1 & 2)...

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