Social Interest – choices that are best for society as a whole Incentives are key in reconciling self interest and the social interest – essentially incentives change how someone may act than they other wise would without incentives The Economic Way of Thinking 1. A choice is a trade-off Because we face scarcity we must make choices To make a choice we select from alternatives You can think about every choice as a trade-off Trade off – an exchange; giving up one thing to get something else 2. Benefit is what you gain from something The benefit of something is the gain or pleasure that it brings and is determined by preferences Preferences are what a person likes and dislikes and the intensity of those feelings Economists measure benefit as the most that a person is willing to give up (i.e. you give up a lot to be in school which demonstrates your want for education) 3. Cost is what you must give up to get something find more resources at oneclass.com find more resources at oneclass.com
Opportunity cost – the highest-valued foregone alternative; that must be given up to get What is your opportunity cost of going to an AC/DC concert? The things you cant afford to buy is you purchase to AC/DC ticket, the things you cant do with your time if you to the concert The choice is not all or nothing, but you must decide how many minutes to allocate to each activity 4. Making a Rational Choice A rational choice is one that compares cost and benefits and achieves the greatest net benefit When making a choice we evaluate the marginal benefit and marginal cost to find greatest gain Net benefit = BENEFIT – COST 5. How much? Choosing at the margin To make a choice at the margin we compare the benefit of a little bit more of something with its cost Marginal – “one more” The benefit that arises from an increase in an activity is called marginal benefit The cost that arises from an increase in an activity is called marginal cost If the marginal benefit exceeds its marginal cost, your rational choice is to do more of that activity To find the total margin you would add all marginal factors (i.e. costs and benefits) 6. Choices Respond to Incentives People respond to incentives A change in marginal cost or a change in marginal benefit changes the incentives that we face and leads us to change our choice People undertake those activities for which marginal benefit exceeds marginal cost and reject options that are vice versa Economics as a Social Science 1. Positive statements (what is/facts) – what is currently believed about the way the world operates, can be right or wrong but will be tested against facts to figure out if right or wrong Capable of evaluation as true or false by observation and measurement (i.e. can be tested) 2. Normative statements (what ought to be/assumption) – depends on values and can not be tested Economic model – a simplified description of the economic world We test economic models by comparing predictions with the facts using 1.
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