chapter 1 scarcity, opportunity cost, & marginal thinking
TRANSCRIPT
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Chapter 1Scarcity, Opportunity Cost, & Marginal thinking
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Laugher Curve
• Q. Why did God create economists?
• A. In order to make weather forecasters look good.
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What Economics Is
• Economics is the study of how human beings coordinate their wants and desires, given the decision-making mechanisms, social customs, and political realities of the society.
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What Economics Is
• One of the key words in the definition is “coordination.”
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What Economics Is
• Any economic system must solve three central coordination problems:
– What, and how much, to produce.– How to produce it.– For whom to produce it.
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What Economics Is
• Scarcity exists because individuals want more than can be produced.
– Scarcity – the goods available are too few to satisfy individuals’ desires.
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What Economics Is
• The degree of scarcity is constantly changing.
• The quantity of goods, services, and usable resources depends on technology and human action.
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What Economics Is
• Economics is the study of how to get people to do things they're not wild about doing and not to do things they are wild about doing.
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What Economics Is
• To understand the economy, you need to learn:
– Economic reasoning.– Economic terminology.– Economic insights economists have about
issues, and theories that lead to those insights.
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What Economics Is
• To understand the economy, you need to learn:– Information about economic
institutions.
– Information about the economic policy options facing society today.
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A Guide to Economic Reasoning
• Economic reasoning is making decisions by comparing costs and benefits.
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Marginal Costs and Marginal Benefits• The relevant costs and benefits
that matter are the expected incremental, or additional, costs incurred and the expected incremental benefits of a decision.
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Marginal Costs and Marginal Benefits• Economist use the term marginal
when referring to additional or incremental.
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Marginal Costs and Marginal Benefits• Marginal cost – the additional cost to
you over and above the costs you have already incurred.
– This means not counting sunk costs – costs that have already been incurred and cannot be recovered.
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Marginal Costs and Marginal Benefits• Marginal benefit – the additional
benefit above and beyond what you’ve already accrued.
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Marginal Costs and Marginal Benefits• According to the economics decision
rule:
– If the relevant benefits of doing something exceed the relevant costs, do it.
– If the relevant costs of doing something exceed the relevant benefits, don’t do it.
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Economics and Passion
• Economic reasoning is based on the premise that everything has a cost.
• It leads to a better society for the majority of people.
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Opportunity Cost
• Opportunity cost is the basis of cost/benefit economic reasoning
• It is the benefit foregone, or cost, of the next-best alternative to the activity you have chosen.
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Opportunity Cost
• In economic reasoning, opportunity cost must be less than the benefit of what you have chosen.
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Opportunity Cost
• Opportunity costs are not limited to individual decisions but to government decisions as well.
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Economics and Market Forces
• The opportunity cost concept applies to all aspects of life.
• It is fundamental to understanding how society reacts to scarcity.
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Economics and Market Forces
• When goods are scarce, they must be rationed.
– That means a mechanism must be chosen to determine who gets what.
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Objective Policy Analysis
• To make clear the distinction between objective and subjective analysis, economics is divided into three categories:
– Positive economics– Normative economics– Art of economics
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Objective Policy Analysis
• Positive economics – the study of what is, and how the economy works.
• Normative economics – the study of what the goals of the economy should be.
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Objective Policy Analysis
• Art of economics – the application of the knowledge learned in positive economics to achieve the goals determined in normative economics.
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Objective Policy Analysis
• Maintaining objectivity is easier in positive economics – harder in normative economics.