ECON 201 1st Edition Lecture 2 Outline of Last Lecture I Economics and Economic Reasoning a Definition of economics b 3 central coordination problems II Guide for Economic Reasoning a Marginal cost and benefit Outline of Current Lecture I Marginal Costs and Marginal Benefits a Economic decision rule II Opportunity Costs a TANSTAAFL III Economic and Market Forces IV Economic Insights V Economic Institutions VI Objective Policy Analysis Current Lecture I Marginal Costs and Marginal Benefits a According to the economic decision rule i If the relevant benefits of doing something exceed the relevant costs do it ii If the relevant costs of doing something exceed the relevant benefit don t do it iii Ex You are given a monthly allowance of 600 minutes from your telephone company You receive a message saying that your 600 minutes have been used up Suddenly you get a phone call from a 1 800 number but all of your minutes have been used up If you answer you will be charged 10 cents per minute and that is your marginal cost If you answer the call and the company calling offers you a new credit card and you need a new credit card that is your marginal benefit II Opportunity Cost These notes represent a detailed interpretation of the professor s lecture GradeBuddy is best used as a supplement to your own notes not as a substitute a Opportunity cost is the basis of cost benefit economic reasoning b It is the benefit foregone or cost of the next best alternative to the activity you have chosen c TANSTAAFL i There are no such things as a free lunch ii A company contacts you and tells you that if you attend a seminar you will receive a free lunch voucher and a free digital camera You live 45 minutes away from the seminar and you must drive your own car to it When you get there you must spend an hour of your own time patiently sitting through the seminar At the end you receive your lunch and camera Were the lunch and camera really free You spent your time and money to get there as well as your own time to be there The lunch and camera were not free because there was an opportunity cost III Economics and Market Forces a Econ Force with social political reality Econ Reality b Econ Force as invisible hands with little restriction Market Force c The invisible hand is the price mechanism the rise and fall of prices that guides our actions in a market IV Economic Insights a Econ Theory Econ Terminology Knowledge Econ Insight b Econ assumptions i Ceteris Paribus holding everything else constant ii Simplification c Microeconomics vs Macroeconomics V Economic Institution a To apply economic theory to reality you ve got to have a sense of economic institutions i Economic institutions laws common practices and organizations in a society that affect the economy VI Objective Policy Analysis a Keeps value judgments separate from the analysis b Positive economics the study of what is and how the economy works c Normative economics the study of what the goals of the economy should be