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ECON 201 Chapter 1 -- The Five Foundation of Economics

by: Sydney McCabe

ECON 201 Chapter 1 -- The Five Foundation of Economics Econ 201

Marketplace > Duquesne University > Economics > Econ 201 > ECON 201 Chapter 1 The Five Foundation of Economics
Sydney McCabe

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About this Document

These notes cover all the material covered in chapter one of Principles of Microeconomics. I have also added in the notes from Dr. Ryan's 12pm class.
Intro to Microeconomics
Dr. Ryan
Class Notes
Incentives, Trade-offs, trade, MarginalThinking, Opportunity Cost, Microeconomics
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This 2 page Class Notes was uploaded by Sydney McCabe on Thursday September 29, 2016. The Class Notes belongs to Econ 201 at Duquesne University taught by Dr. Ryan in Fall 2016. Since its upload, it has received 2 views. For similar materials see Intro to Microeconomics in Economics at Duquesne University.


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Date Created: 09/29/16
Econ 201: Principles of Microeconomics  1 Chapter 1 – The Five Foundations of Economics ­­ What is Economics?  scarcity – the limited nature of society’s resources, given society’s unlimited wants  o the basic question economics seeks to answer: How do we satisfy unlimited  wants/needs given limited resources?  Economics—how people allocate limited resources to meet unlimited wants o Two subsets of economics:  Micro – individual units that make up an economy  Macro – overall aspects and workings of an economy (ie. inflation,  growth, employment, interest, productivity) ­­What are the Five Foundations of Economics?  All questions of economics can be broken down into their foundational components  Five Components: o Incentives – factors that motivate a person to act or exert effort (ie. studying vs.  going out because studying has a greater long­term benefit)   Positive incentives: encourages action (ie. end­of­the­year bonus for  doing well and remaining with the company)  Negative incentives: encourages action to avoid punishment or negative  outcome  **Incentives can lead to unintended consequences  maintaining incentives is imperative for societal advancement (ie. patents and copyright laws are incentives for creation/ingenuity) COST  ACTIVITY INCREASES DECREASES DECREASES INCREAES o Trade­offs – “either/or” (ie. China wanting to clean up air pollution or advance  industrial economics)  Trade­offs remind us that each and every action incurs a cost o Opportunity Cost – highest­ valued forgone alternative sacrificed in order to get  something else; next (or equally) best alternative  “There is no such thing as a free meal”   Every decision has a cost; although a free meal seems like there is  no cost, you sacrifice the opportunity cost of what you could be  doing with your free time (ie. studying, sleeping, socializing with  friends)   Minimize opportunity cost by selecting the option with the largest benefit   Consider whether or no the alternatives are better than what you are  currently doing  Economic thinking – systematically evaluating available opportunities in  order to make the best possible decision Econ 201: Principles of Microeconomics  1  Economic thinkers use marginal analysis to break down decisions  into smaller parts o Marginal Thinking – requires decision­makers to evaluate whether the benefit of  one more unit of something is greater than its cost; thinking at the margin means  weighing the cost vs. the benefit of any choice and then making the choice with  the greatest payoff   Example: Fast food restaurant offers 50 cent fries with your purchase of a  double cheeseburger. You are already going to purchase the cheeseburger  (this is a sunk cost which we will deal with later) but you have to use  marginal thinking to evaluate whether or not you want to also get fries. Is  the marginal cost, the additional 50 cents, worth the marginal benefit,  French fries, in this situation?  Sunk cost – a cost that is already incurred; this cost is not on the margin  so it does not affect the new decision  in the fast food example, the cost of the cheeseburger as well as  the cost of driving to the restaurant, taking the time to order, etc.  are all sunk costs o Trade—the voluntary exchange of goods and services between two or more  parties  Voluntary trade between rational individuals creates value for everyone  involved  Markets—bring together buyers and sellers to exchange goods and  services  Important factors to remember about trade:  Trade creates value  o The only reason a trade occurs is because each person  involved values what they are receiving higher than they  value what they are giving in return   Trade is voluntary   Value is subjective  o If value were not objective the principle that trade creates  value would not exist and therefore trades would not occur  Transaction costs act as a barrier to trade o Transaction cost – time/effort needed to search out trade o When transaction costs increase, trade decreases  Comparative Advantage – when an individual, business, or country can produce at a  lower cost than a competitor can  o Relies somewhat on specialization  Specialization provides so that you don’t have to be making everything  yourself. You have one specialty and someone else has another, allowing  you to trade for the goods/services you need


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