Thinking Like An Economist
Thinking Like An Economist ECON 22060-002
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This 2 page Class Notes was uploaded by Amy Turk on Friday May 20, 2016. The Class Notes belongs to ECON 22060-002 at Kent State University taught by Dr. Ludmila Leontieva in Spring 2016. Since its upload, it has received 2 views. For similar materials see Microeconomics in Economcs at Kent State University.
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Date Created: 05/20/16
THINKING LIKE AN ECONOMIST ● economics = the study of how people make choices under conditions of scarcity and of the results of those choices on society ● scarcity makes trade offs necessary ● the scarcity principle = (no-free-lunch principle) although we have boundless needs and wants, the resources are limited ○ having more of one good thing means having less of another ● a trade-off involves compromise between competing interests ● cost-benefit principle = an individual should take action if and only if the extra benefits are at least as great as the extra costs ● rational person = someone with well-defined goals who tries to fulfill those goals as best they can ● the benefit of taking any action is the dollar value of everything you gain by taking it ○ the cost of taking any action is the dollar value of everything you give up by taking it Economic Surplus ● the benefit of taking an action minus the cost ● your goal is to choose actions that generate the largest possible economic surplus Opportunity Cost ● the value of what you must sacrifice to undertake an opportunity ● all costs ● not the combined value of all possible activities you could’ve pursued, but only the value of your best alternative ● rational people tend to compare costs and benefits ● sometimes people ignore costs or benefits that they should take into account and other times they are influenced by costs or benefits that are irrelevant ● the key to using the cost- benefit principle lies in recognizing precisely what taking a given action prevents us from doing ● sunk costs = costs that are beyond recovery at the moment a decision is made ○ occur whether or not an action is taken ○ they are irrelevant to the decision ● marginal cost = the increase in total cost that results from carrying out one additional unit of an activity ● marginal benefit = the increase in total benefit that results from carrying out one additional unit of an activity Normative vs Positive ● people sometimes choose irrationally ● normative economic principle = says how people SHOULD behave ○ ex. cost-benefit principle ● positive economic principle = predicts how people WILL behave ○ ex. the incentive principle = a person is more likely to take an action if its benefit rises and less likely to take it if its cost rises Micro and Macro ● microeconomics = study of individual choice under scarcity and its implications for the behavior of prices and quantities in individual markets ● macroeconomics = study of performance of national economies and the policies gov’ts use to try to improve that performance
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