Chapter 1 Notes
Chapter 1 Notes ECON 2106-080
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This 3 page Class Notes was uploaded by Airielle Thomas on Wednesday March 2, 2016. The Class Notes belongs to ECON 2106-080 at Georgia State University taught by Dr. Shelby Frost in Winter 2016. Since its upload, it has received 15 views. For similar materials see PRINCIPLES OF MICROECONOMICS in Economcs at Georgia State University.
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Date Created: 03/02/16
ECON 2106 SPRING 2016 *These notes are adapted from the textbook Principles of Microeconomics, written by Dirk Mateer and Lee Coppock. Chapter 1: The Five Foundations of Economics The five foundations of economics are: incentives, tradeoffs, opportunity costs, marginal thinking, and “trade creates value.” What is Economics? Economics: the study of how people allocate their limited resources to satisfy their nearly unlimited wants. Scarcity: the limited nature of society’s resources; wants outweigh needs Microeconomics vs. Macroeconomics Microeconomics: the study of the individual units that make up the economy. Macroeconomics: the study of the overall aspects and workings of an economy. (Ex. Growth, employment, interest rates, inflation/deflation, etc.) The Five Foundations of Economics Incentives Incentives: factors that motivate you to act or exert effort. Incentives can be positive, negative, direct, or indirect. Positive vs. Negative Incentives Positive and negative incentives both encourage action. Ex. Positive: Good grades motivate students to study more. Negative: Fear of a bad medical diagnosis encourages people to take care of themselves. Positive incentives need to be paired with negative incentives to work. Direct vs. Indirect Incentives Direct incentives are clearly stated and usually easy to recognize. Ex. If a local grocery store lowers its prices for the Delicious of brand water, it is likely to attract more business from customers that would not usually shop at said store. Indirect incentives aren’t as clear. Ex. Lower prices for Delicious may encourage shoppers to buy more water. Incentives play a role in innovation. Ex. Patents, etc. allow inventors to have exclusivity to their work for a designated period of time. ECON 2106 SPRING 2016 ECON 2106 SPRING 2016 TradeOffs Investing time in one activity will not allow for time, resources, or the energy to do something else. Ex. A student spends three hours studying for their economics exam, meaning that said student will have to study for their math exam later. Opportunity Costs Opportunity Cost: the highestvalued alternative that must be sacrificed in order to get something else. Ex. A student wins a contest sponsored by a travel agency. The student has won an all expense paid spring break trip and must choose between surfing in Hawaii or camping in Yellowstone National Park. If the student chooses to go camping in Yellowstone, he/she forfeits the opportunity to go surfing in Hawaii. The trip to Hawaii is the opportunity cost, because this choice was sacrificed to go camping. Making the best possible decision is to select the option that provides the largest benefit. Marginal Thinking Marginal Thinking: evaluating the available opportunities to make the best decision possible. Economic Thinking: the process of systematically evaluating a course of action. Trade Markets: bring buyers and sellers together to exchange goods and services. Trade: the voluntary exchange of services between two or more parties. Comparative Advantage: the situation in which an individual, business, or country can produce at a lower opportunity cost than a competitor can.