Micro Econ Chapter 1 Lecture Notes PDF

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Chapter 1● A central and fundamental theme in economics is that people have unlimited wants but limited means to satisfy them. ● The study of economics arises because of the necessity of choice, and the necessity of choice arises because of the fundamental problem of scarcity of resources. ● Opportu...

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Chapter 1 ● A central and fundamental theme in economics is that people have unlimited wants but limited means to satisfy them. ● The study of economics arises because of the necessity of choice, and the necessity of choice arises because of the fundamental problem of scarcity of resources. ● Opportunity Cost: the true cost of something is the next best alternative you must give up to get it ● Marginal Decision: decision made at the margin of an activity about whether to do a bit more or a bit less of that activity ● Marginal Analysis: weather marginal benefit > marginal cost ● Economists tend to believe that to change people’s behavior, you must change their incentives. ● Increases in total output realized when individuals specialize in particular tasks and trade are known as the gains from trade. ● Economy is efficient when one person can be made better off by rearranging how resources are used only by making someone else worse off. ○ Equity and efficiency are often at odds. ○ Markets usually achieve efficiency because the incentives built into the market economy ensure that resources are put to good use and that opportunities to make people better off are not wasted. ○ When markets don’t achieve efficiency, government intervention can improve a society’s welfare. ● Cost-benefit Principle: pursue only those whose benefits are at least as large as their costs ○ either/or choices ● Your willingness to pay is how much you value a good. ● Economic Surplus: total benefits minus the total costs flowing from a decision ● Sunk Cost: a cost that has been incurred and cannot be reversed ○ Exists whether you make a choice or not ● Marginal Benefit: the extra benefit from one extra unit ● Marginal Cost: the extra cost from one extra unit ● Rational Rule: if something is worth doing, keep doing it until your marginal benefits equal your marginal costs ● Interdependence Principle: your best choice depends on the other choices you make, the choices others make, developments in other markets, and expectations about the future...