Principle 2: The Cost of Something Is What You Give Up To Get It - opportunity cost - whatever must be given up to obtain some item 1-1c Principle 3: Rational People Think At The Margin - rational people - people who systematically and purposefully do the best they can do to achieve their objectives - marginal change - a small incremental adjustment to a plan of action - is the marginal benefit greater than the marginal cost? 1-1d Principle 4: People Respond To Incentives - incentive - something that induces someone to act - a higher price in the market provides incentives for buyers to consume less and for sellers to produce more - many policy changes of cost or benefits result in altered behavior of people that they affect; higher gas tax means smaller cars in Europe 1
Tuesday, June 16, y - incentives and seat belts; 1975 Sam Peltzman argued that seat belt laws caused an alteration in drivers cost benefit calculation - Peltzman ’s evidence showed fewer death per accident but more accidents - “ If the policy changes incentives it will cause people to change their behavior” 1-2 How People Interact 1-2a Principle 5: Trade Can Make Everyone Better Off - America and China are competitors because they produce similar goods - trade allows specialization -
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