Microeconomics TR 2 15 3 30 w Dr Rohlin Chapter 1 10 Principles What does economics study 1 15 2015 Scarcity limited nature of society s resources Economics study of how society manages its scarce resources Principle 1 People face tradeoffs Main tradeoff is between efficiency and equality Efficiency when society gets the most from its resources Equality when prosperity is distributed uniformly among everyone Principle 2 The cost of something is what you give up to get it Opportunity Cost OC whatever must be given up to obtain something Explicit Costs obvious costs comparable to taking money out of the bank or writing a check Implicit Costs not so obvious costs OC money you lost by doing something else Example Movie Night instead of working for 10 hour at your job you take a friend to the movies for 2 hours Tickets are 10 each o 20 for movie tickets explicit cost o 20 lost from not working implicit cost o Technically you lost 40 total o According to the book OC is the total amount you lost 40 o Dr Rohlin disagrees and says the OC is the implicit cost 20 from not working Essentially the Opportunity Cost OC is what you gave up in order to do something else like stay at home and play Xbox or go to the movies Principle 3 Rational people think on the margin Marginal benefit vs marginal cost Margin the benefit cost etc for the next quantity or good People are more likely to make deals when the marginal benefit is greater than the marginal cost Example Airline it costs an airline 200 000 to make a flight The plane seats 400 people In order to get profit to 0 tickets are 500 each o 5 minutes before the flight there are 6 seats left o Customer offers to buy a seat for 200 do you sell it to them o Yes The sale brings you closer to 0 than if you don t sell the ticket thinking on the margin Sunk costs cost that doesn t change based on decision o Example you buy an airline ticket for 200 but decide not to use it Regardless of if you use the ticket or not you still lost 200 200 sunk cost Principle 4 People respond to incentives Incentive something that induces a person to act Principle 5 Trade can make everyone better off this is in chapter 3 and is also related to macroeconomics Principle 6 Markets are usually a good way to organize economic activity How to determine prices and quantities Market buyers and sellers determine prices and quantities Command one person or government decides prices and quantities Traditional history affects or determines prices and quantities o Example gender pay gap black white pay gap Principle 7 Governments can sometimes improve market outcomes 1 By creating laws and enforcing them a Important role of government is enforcing property rights preventing theft b People are less inclined to work or produce goods if it s easy to steal from others The rest of the principles are going to be covered in class on 1 20 2015
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