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Microeconomics Chapter 1

by: Sophomore Notetaker

Microeconomics Chapter 1 ECON 1011

Sophomore Notetaker
Wash U
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This 2 page Class Notes was uploaded by Sophomore Notetaker on Thursday September 29, 2016. The Class Notes belongs to ECON 1011 at Washington University in St. Louis taught by Bandyopadhyhyay in Fall 2016. Since its upload, it has received 27 views. For similar materials see Microeconomics in Economics at Washington University in St. Louis.


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Date Created: 09/29/16
Chapter 1: Thinking Like an Economist Economics: Studying Choice in a World of Scarcity Economics is the study of how people make choices under conditions of scarcity and of  the results of those choices for society. The Scarcity Principle (the No­Free Lunch Principle) – Although we have boundless  needs and wants, the resources available to us are limited. So having more of 1 good  thing usually means having less of another. The Cost­Benefit Principle – An individual (or a firm or society) should take and action  if, and only if, the extra benefits from taking the action are at least as great as the extra  costs. o Ex: if deciding whether to have 5 20­seat classrooms or have a 100­seat  classroom, you would have to see if the value of the improvement in instruction  outweighs its additional cost of $1000 per student Applying the Cost­Benefit Principle  Rational person – someone with well­defined goals who tries to fulfill those goals as best they can  Economic surplus – the benefit of taking an action minus the cost o Choose an action that would generate the largest possible economics surplus  Opportunity cost – the value of what must be forgone to undertake an activity 3 Important Decision Pitfalls  #1: Measuring Costs and Benefits as Proportions rather than Absolute Dollar  Amounts o Ex: Would you go downtown to save $10 on a $2,000 laptop/ $10 on a $25  videogame?   Most replied no for the laptop but yes for the videogame since you are  saving a higher percentage on the videogame and a very little percentage  on the laptop  This is faulty reasoning. The benefit of the trip downtown is not the  proportion you save on the original price. Rather, it is the absolute dollar  amount you save #2: Ignoring Implicit Costs o overlooking the implicit value of activities that fail to happen o Ex: Using your flight coupon for spring break or for wedding in Boston. The most you are willing to spend for spring break is $1,350. The flight costs $500 and your expenses will be $1000, totaling $1500, so $150 over your budget so you would  not go. But if you used the coupon, you would save $500, and have an economic  surplus of $350 in your budget.  Since the wedding is not really optional, you would have to spend an  additional $400 along with the $1000 you already spent. Your total for  both trips would end up being $1400; $50 over your budget. You would  not be able to go to your spring break trip  The implicit cost of going on spring break would be the $400 you would  spend going to the wedding #3: Failure to Think at the Margin o The only costs that should influence a decision about whether or not to take an  action are those we can avoid by not taking the action o The only benefits we should consider are those that would not occur unless the  action were taken o Sunk cost – costs that are beyond recovery at the moment a decision is made  (irrelevant costs)  Ex: money spent on a nontransferable, nonrefundable plane ticket  Ex: paying $10 for a buffet o Marginal cost – cost of an additional unit of activity o Marginal benefit – the benefit of an additional unit of activity o Ex: NASA should continue to launch shuttles as long as the marginal benefit of  the program exceeds the marginal cost o Average cost – the total cost of undertaking n units of an activity divided by n o Avg. benefit – the total benefit of undertaking n units of an activity divided by n o Measure the increment of activity under consideration not just the averages Normative Economics Vs. Positive Economics  Normative Economic Principle – provides guidance about how we should behave o Ex: cost­benefit principle – we should ignore sunk costs when making decisions  about the future  Positive Economic Principle – describes how we actually will behave o Cost­benefit principle not always a positive (descriptive), economic principle  Incentive Principle – A person (or a firm or society) is more likely to take an action if its  benefit rises, and less likely to take it if its cost rises. In short, incentives matter. o A positive economic principle  o Stress that the relevant costs and benefits usually help us predict behavior, but at  the same time does not insist that people behave rationally in each instance. o Ex: if price of heating oil rises sharply, we would invoke the C­B principle to say  that people should turn their thermostats down and invoke the Incentive principle  to predict that the average thermostat settings will in go down Economics: Micro and Macro   Microeconomics – describes the study if individual choices and of group behavior in  individual markets  Macroeconomics – the study of the performance of national economics and of the  policies that governments use to try to improve that performance o Tries to understand things such as: national unemployment rate, the overall price  level, and the total value of national input


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