ECON 260 1st Edition Lecture 3Outline of Last Lecture1. Pre-Lecture Video 0001, “Intro” – Key Concepts2. 10 Basic Principles of Economicsa. Principle 1: Agents respond to incentives.b. Principle 2: Good institutions can align self and social interest.c. Principle 3: Tradeoffs are EVERYWHERE.d. Principle 4: Rational People Think at the Margin.e. Principle 5: Trade can make everyone better off.f. Principle 6: Wealth and Economic Growth are related.g. Principle 7: Institutions Matterh. Principle 8: Booms and Busts can not be controlled, only mitigated.i. Principle 9: Prices rise when governments print too much money.j. Principle 10.Central Banking is a Hard JobOutline of Current Lecture 1. Pre-Lecture Video 0002, “Demand” – Key Concepts2. Consumer Choice and Demand, part 1Current LecturePre-Lecture Video 0002, “Demand” – Key ConceptsDemand refers to the amount of desire people - “demanders” - have for a good, a service, a “widget.” - The amount of benefit, happiness and/or well-being each person gets from having the good is measured by how much they are willing to give up - the opportunity cost - and then standardized with dollars. - No demander will pay more for a good than the benefit derived from that good - each buyer will pay only what it is worth to that buyer. - That amount varies among individuals, so when examining the market for a good, the people aresorted in order of the most to least desire. The demand curve is a visual representation of all the people who have any amount of willingness to purchase a good. The graph stands for the entire market for that good. Only the people who would pay top dollar stand at the high end of the line. As the line moves down in price, more and more people are 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.willing to buy the good, until at the lowest point even the people who will only buy at the lowest possible price are included. Consumer Choice and DemandGood institutions can be described with market structure. Retail is a market, but so is labor, politics, dating, etc. The demand side of economics is about consumers, whether this means individuals, firms, even entire industries. Example: The auto industry is the seller when it comes to vehicles, but has the buyer’s demand for steel, for skilled engineers, for factory machinery. “Consumers” includes anyone who wants to buy anything in order to increase well-being. The happiness, benefit or well-being gained from consuming a good is called utility.Example: What makes you buy coffee in the morning? You do it in order to maximize your happiness – coffee wakes you up, improves your mood, helps you function better as you start your day. Utility is difficult to measure. It’s determined by: - Preferences for a good, which allows us to sort likes.Example: A small fraction of the class enjoy anchovies on pizza, more students like onions, and most like pepperoni, so pepperoni pizzas would provide the greatest utility.- how much of it the consumer already has. You do not get as much happiness out of things whenyou already had some.Examples:  If someone gives you a pizza when you had none, your response will be, “yay pizza!” time. When someone gives you a pizza and you already had two whole pizzas, it is, “Oh, thanks,” time.  A homeless person would value $5 far more than would Bill Gates. He still values it, but a 5 on its own is negligible when added to what he already has.Preferences are “well-behaved” if they lead to:- Being able to rank choices. Even if there is no preference between two items, that just means they are ranked equally, at the level of indifference- More is always better. We all have wants, and they will never be fully satisfied.- Combinations are preferable.o Example. You may rank two large pizzas and a six pack of beer as equally desirable, but better than either of those would be one pizza and three beers.When you get an apple (or a pizza, or $5), the first one is always the best - the cause of the most happiness, the source of the most utility. As you get the second, third, fourth fifth, and on down the line,the increase in happiness, or marginal utility is less and less for each addition to your pile of apples or pizzas or money. This is called the Law of Diminishing Marginal Utility. (see 6-11 of classroom slides “Consumer Choice and Demand” for charts and graphs depicting marginal utility).Informal classroom poll: how many eat the same breakfast every day? Very few. Dr. Groves: "I do, and it drives my wife crazy." He is a rarity, for most people the diminishing marginal utility drives them to want variety. Choosing a different breakfast from day to day is thinking on the margin.Example: In comparing an apple vs. orange, a rational person ranks them by their utility. The opportunity cost of the apple is the orange. If the person has chosen the apple, that means that the utility of the orange must be equal or less than that of the apple, or else you would have chosen the orange.Price isn't a perfect measurement of utility. You may not like the price, but you still buy it because of the side benefits. Examples: - You are unhappy about how much you have to spend on new tires - but without the tires, your car is useless, and you have a much harder time getting around without the car. Your life is impacted positively by the tires.- Buying a round of drinks at the bar - you only get one drink, but you get to hang around having fun with your friends at the bar.- Spending on a date: you didn't get to eat both dinners, but you got to spend time with a person you are interested in.- Health insurance premiums lower the cost dramatically if you do have a health emergency.*NOTE* For the purposes of basic economics, when there is a "tie" we assume the answer is yes.If the utility is 12 and the purchase price is 12 then that purchase happens.You can read the graph vertically or horizontally, depending on which variable you know to start with. Consumption behavior, the things people buy and don't buy, is the real-world source for information about