Economics 201- Chapter Two: The Economic FrameworkAnd you may find yourself living in a shotgun shackAnd you may find yourself in another part of the worldAnd you may find yourself behind the wheel of a large automobileAnd you may find yourself in a beautiful house, with a beautiful wifeAnd you may ask yourself - Well...How did I get here?The Bottom Line…Economics then is about decision-makingWhat does that mean?Everyone (you, households, firms, the government) should weigh the costs and benefits properly when making any decisionExample, should you go to college or get a full-time job out of high school?What are the benefits of going to college?What are the costs?Think about your schooling..Weighing Costs and BenefitsTHE BENEFITS…When making a decision, what do you gain by saying “yes”?Benefits are normally fairly straightforwardShould the government build a new road? Benefit is obviously a new road. Should you buy that house? Benefit is the enjoyment you expect to get out of the houseShould you go to college after high school? Benefit is one year of college educationThis is the easy part because the benefits are obvious.THE COSTS… Economists like to think this is our big contribution to the worldPerhaps a slightly different way to frame a problem, but we feel very strongly that it is the correct way to view the problem before making the correct decisionHow much does a movie cost?How much does it cost to go to college for a year?HUGE IDEA IN ECONOMICS!!When calculating the cost of a decision, you should always include the opportunity cost OPPORTUNITY COST: THE VALUE OF THE NEXT BEST FOREGONE OPPORTUNITY WHENEVER A DECISION IS MADE How much does a movie cost?$11 plus 2 hoursWhat does it cost to skip class?Notes and knowledgeWhat does it cost to come to class?Sleep and TimeHow much does it cost to invest $1,000 in Coca-Cola?Money you could have spent elsewhereMake sure you only include the next best thing you gave up, not every option!Decision at the Margin Margin : means one more or the next ore or one additionalMost decisions you make are small, incremental decisions… How do I spend the next free hour? Do I want to buy 1 more pair of shoes? Do I want to take 12 or 15 hours this semester?We normally don’t measure the total benefits or costs, but instead marginal benefits and marginal costs of a decision If Marginal benefit > Marginal cost Do it!! If Marginal benefit < Marginal cost Don’t!! People Respond to IncentivesSince, People behave rationally, and People make small everyday decisions based on comparing small benefits against small costs Then, Small changes can be enough to alter people’s decisions and behaviorsExamples Prices (sales)Cheating (exams)PRODUCTION POSSIBILITIES FRONTIER (PPF)PPF – an economic model that shows the maximum combination of goods/services that can be produced given available resources and technologyUseful to show:The consequences of scarcityTradeoffs from making decisions (benefits/costs when making a decision) This is sometimes called the frontier curve.PPF DefinitionsEfficient Points: All points on the PPF We are using all resources to their best use Level of technology is unchanged Inefficient Points: All points inside the PPFWe are not using all of our available resources; resources are left idle; we can do better Unattainable Points: All points outside the PPFBecause of scarcity (fixed resources and technology), these points are not possible to attainBig Idea in EconomicsThe more of one good we have, the more expensive they become!We must sacrifice more and more of good number 2 for each good number 1Law Of Increasing Opportunity Cost: As we produce more of one good we must sacrifice more and more of another goodThis happens if you move the other way along the curve