chapter2

chapter2 - ECON1001E,F Introduction PartII 1 Introduction

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1 ECON1001E,F Introduction Part II
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Introduction Scarcity and Competition Opportunity Cost Cost and Benefit Analysis Some Common Pitfalls for Decision Makers Positive Vs. Normative Economics
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What is Economics? Studies allocation of scarce resources among  competing ends for most goods, wants (desires) exceed what is available  (limited resources).   Thus, having more of one thing usually means having less  of another.  People have to make choices. Studies how agents respond to incentive Is what economists study
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Economics: studying choice in a world of  scarcity The Scarcity Principle, a.k.a., the No-free-lunch  Principle: Although we have boundless needs and wants, the  resources available to us are limited. So having  more of one good thing usually means having less of  another. The Cost-Benefit Principle: An individual (or a firm or a  society) should take an action if, and only if, the extra  benefits from taking the action are at least as great as  the extra costs
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Opportunity Costs For economists, costs mean opportunity costs  or alternative costs. Opportunity Costs are the best foregone  opportunities (or best alternative you otherwise  would have chosen) Cost is important for decision making in  economics Costs and choices are twin (You can’t have one  without the other)
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Example 1: Opportunity Costs  If you are given a choice of the following three  candies free of charge: II) Snicker ($0.7) III) Nestle Crunch ($1.0) What is your opportunity cost if you choose  (c) Snicker, (d) Nestle Crunch, or (e) not  enough information. 
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Example 2: Opportunity Costs You have three job offers, they are indifferent to you  except for their pay.  Here are the offers: Goldman Sachs $100,000 Merrill Lynch   $90,000 Morgan Stanley $80,000 What is your opportunity cost if you take the job at  Merrill Lynch? (a) $10,000, (b) $100,000 (c) $80,000, or  (d) Not enough information. 
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Example 3: Opportunity Costs You won a free ticket to see an Eason Chan concert (which has no  resale value).  Andy Lau is performing on the same night and is your next-best  alternative activity.  Tickets to see Andy cost $40/ticket.  On any given day, you would be willing to pay up to $50 to see  Andy.  Assume there are no other costs of seeing either performer. Based  on this information, what is the opportunity cost of seeing the  Eason Chan concert? (a) $0, (b) $10, (c) $40, or (d) $50.  (Source:  http://www.marginalrevolution.com/marginalrevolution/2005/09/opp ortunity_cos.html)
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This note was uploaded on 03/12/2012 for the course ECON 1002 taught by Professor Fu during the Winter '09 term at HKU.

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chapter2 - ECON1001E,F Introduction PartII 1 Introduction

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