2305 ACOM-Applied Economics

Economics

the study of how people make choices under conditions of scarcity and of the results of those choices for society

The Circular Flow of Income and Expenditure

The circular flow diagram shows the transactions among households, firms, governments, and the rest of the world.

Critics of cost benefit approch

people don't often calculate cost and benefits when deciding what to do

Marginal Benefit

the increase in total benefit from one additional unit of activity

Marginal Cost

the increase in total cost from one additional unit of activity

The Cost Benefit Principle

Take an action if and only if the extra benefits are at least as great as the extra costs

Incentive Principle Benefits

Actions are more likley to be taken of their benefits rise

The Cost Benefit Principle

An individual (or a firm or a society) should take an action if, and only if, the extra benefits from taking the action are at least as great as the extra costs.

Marginal Cost

Average cost is divided by the number of units

Should there be 4 separate sections of the class or one big class

Benefit: students learn more effectively in a smaller class Cost: Smaller classes are more expensive

You speed on the way to work but not on the way to school

Example of Cost Benefit Principle

you clip grocery coupons but Bill Gates does not

Example of Cost Benefit Principle

you skip your regular dental check

Example of Cost Benefit Principle

Forest lives in complete isolation in Montana. He is self-sufficient and feeds himself through hunting, fishing, and farming. Which of the following statements about Forest is true

Forest has to make trade-offs.

Benefit - explicit = ?

Implicit

Josh wants to go to the football game this weekend, but he has a paper due on Monday. It will take him the whole weekend to write the paper. Josh decides to stay home and work on the paper. According to the Scarcity Principle, the reason Josh doesn't go to the game is that:

Josh can't go the game and finish the paper

The Scarcity Principle

People have unlimited wants and limited resources. Having more of one good mean less of having another. aka..No Free Lunch Principle

Government Spendings

Roads, health care, education, helicopters, police officers salaries, judges salaries.

True or False- Cost and Benefit are not just money.

True

absolute advantage

a particular task if he or she can perform the task in fewer hours then the other person

comparative advantage

a particular task if his or her opportunity cost if preforming the task is lower then the persons opportunity cost

Incentive principle costs

actions are less likely to be taken if their costs rise

Expenditures

are purchases of goods and services.

Marginal Benefit

average benefit is total benefit divided by the number of units

Rest of the World

borrows from us or lends to us depending on whether net exports are positive or negative.

Household

buy consumer goods and services and consumption expenditures They then pay for their taxes to the government

Government

buys goods and services and borrows or repays debt if spending exceeds or is less than taxes

Economics is best defined as the study of

how people make choices in the face of scarcity and the implications of those choices for society as a whole.

Suppose that the extra cost to Tim of a third glass of soda is zero because he's at a restaurant that gives free refills. According to the Cost-Benefit Principle Tim should

drink a third glass of soda if the extra benefit of doing so is positive

The incentive Principle

examine people's incentives to predict their behavior

Firms

hire factors of production from households. They pay income to households. capital goods from other firms which are investment expenditure by firms.

According to the Incentive Principle, people will be less likely to smoke if the government

increases taxes on cigarettes, effectively raising the price

The Incentive Principle states that a person

is more likely to take an action if its benefit increases

The Cost-Benefit Principle indicates that an action should be taken if

its extra benefit is greater than or equal to its extra cost

explicit cost + implicit cost = ?

opportunity cost

An implication of scarcity is that

people must make trade-offs

The Scarcity Principle tells us ______, and the Cost-Benefit Principle tells us ______

that choices must be made; how to make good choices

Janie must choose to either mow the lawn or wash clothes. If she mows the lawn, she will earn $30, and if she washes clothes, she will earn $45. She dislikes both tasks equally and they both take the same amount of time. Janie will therefore choose to ______ because it generates a ______ economic surplus

wash clothes; bigger