Chapter 1 - Economics 101 Chapter 1 Thinking Like an...

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Economics 101 Chapter 1: Thinking Like an Economist 1. Economics: Studying Choice in a World of Scarcity -Cost matter -The value of what we give up is the COST -Scarcity is a fact of life -eg. Never enough time, money, energy, etc. -Typically, to get benefits of something, we must give up something else -Scarcity Principle -The available resources are limited to our (boundless) needs and wants -Having more of one thing means having less of another -AKA "No Free Lunch Principle" -eg. Vancouver 2010 -Money could be used for something else i.e. health care -Cost-Benefit Principle -An individual/a firm/a society should take an action if, and only if, the extra benefits from taking the action are greater than the costs -Benefits and Costs -Money isn't everything 2. Applying the Cost-Benefit Principle -People are rational -People know their goals and try to fulfill these goals as best they can with the limited resources they have -If there is no scarcity, then there is no economic problem -Not all decisions and choices involve only economic considerations -Although many decisions that are taken on non-economic considerations (emotions, habits, culture, religion, decree, etc.) will have economic implications. -Reservation Prices in $$ -Buyer’s Reservation Price -The highest dollar price a buyer would be willing to pay for any good or service -Interpreted as a Quantitative Measure of the benefit the buyer expects to receive for the good or service -Seller’s Reservation Price -The lowest dollar payment a seller would be willing to accept for giving up a good or performing a service -It could be taken as the Quantitative Measure of the seller’s cost of the good or service -Economic Surplus (net benefit) -Economic Surplus = Benefit – Cost -Rational Decision Makers take all actions that yield a positive economic surplus -If a market transaction is voluntary, both buyer and seller must think the deal makes them better off
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