ECON 100 1st Edition Lecture 3 Outline of Last Lecture I Economics A Microeconomics vs Macroeconomics II Two Big Economic Questions A What how and for whom 1 Factors of Production B Self Interest vs Social Interest 1 Efficiency 2 Equity Outline of Current Lecture I Four Topics That Illustrate Tension Between Self and Social Interest A Globalization B Information Age Monopolies C Climate Change D Economic Instability II 6 Key Ideas Define The Economic Way of Thinking III Economics As a Social Science A Economic Models IV Economics As a Policy Tool Current Lecture Four Topics That Illustrate Tension Between Self and Social Interest 1 Globalization the expansion of international trade borrowing and lending and investment Self interest of consumers low cost goods services produced in other countries Self interest of multinational firms produce in low cost regions sell in high cost regions 2 Information Age Monopolies 3 Climate Change 2 3 of the Carbon emissions from USA Russia EU China and India It is in our self interest to use electricity and gasoline 4 Economic Instability 1993 2007 incomes in the USA increased 30 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 August 2007 financial stress Lending and borrowing choices of banks and individuals were made in selfinterest Six Key Ideas Define The Economic Way Of Thinking 1 A choice is a trade off an exchange giving up one thing to get something else 2 People make rational choices by comparing benefits costs A rational choice achieves the greatest benefit over cost for the person making the choice answers the question what goods services 3 Benefit is what you gain from something Determined by preferences what a person likes dislikes The most a person is willing to give up for something else 4 Cost is what you must give up to get something Opportunity cost highest valued alternative that must be given up The things you can t afford to buy and the things you can t do with your time 5 Most choices are how much choices made at the margin To make a choice at the margin evaluate the consequences of making incremental changes in the use of your time Benefit from an increase in an activity Marginal Benefit MB Opportunity cost of an increase in an activity Marginal Cost MC Marginal benefit marginal cost rational choice do more of that activity 6 Choices respond to incentives Change in marginal cost benefit change in incentives change in choice made Predict how choices change by looking at changes in incentives Incentives key to reconciling self and social interest Economics As a Social Science How the economic world works Positive Statement what is can be tested by checking it against the facts Normative Statement what ought to be expresses an opinion and cannot be tested policy goals Economists test economic models description of some aspect of the economic world that includes only those features that are needed for the purpose at hand Compare predictions and facts also use natural and economic experiments and statistical investigations Economics As a Policy Tool Economics toolkit for advising government businesses and individuals Policy questions involve positive and normative Normative part is the goal economists can t help For a given goal economists provide a method of evaluating alternative solutions comparing marginal benefits costs