Economics 101 - Lecture 2 PDF

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Lecture 2...

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Economics 101 – Professor James Pesando – Lecture 2   

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Study of Rational Decision Making o Marginal Benefit > Marginal Cost Fixed Costs = Sunk Costs (We do not include these when calculating opportunity cost as they have already been incurred) The only relevant costs are those that can be avoided if the action is not taken o Example  Jack spends $75 on a concert ticket, but the benefit he receives from attending this concert is actually worth $100. He stumbles upon an unexpected cost of $50; his dilemma is now whether or not he should buy the ticket.  MB = 100  MC = 50 (He could save 50 by not attending the concert)  Although Jack would save money by not attending the concert, he gains $50 more from going, than not going. Therefore, MB>MC. We do not include the $75 in this calculation as the cost has already been incurred and he cannot change it.  However there is a possibility for Jack to sell his ticket for $60  MB = 100  MC = 50+60  MBMC (Do Not Attend) The 90$ he gets by not going is less than 100$ benefit he gets by going. Policy Making o Policy makers always have to take into account the unintended consequences of decisions they make.  E.g. If all drivers are forced to wear seatbelts, the number of accidents will actually increase as drivers will believe that they are less likely to get hurt in a crash  If firing workers becomes much more difficult, then firms will stop giving out long-term contracts, unintentionally creating job insecurity.  If a law in Ontario states that all factories must pay fired-workers good severance packages, the factory owners will instead open up somewhere else (e.g. Ottawa, Montreal)...