Economics Module 1
Something that induces a person to act is called
an incentive.
The economic way of reasoning assumes that individuals
are rational and respond to incentives. *Rational people respond to incentives.
Opportunity Cost
The cost of something; what you give up to get it.
Marginal means : What does it mean to think at the margin ?
-Additional -to think about your very next action, or step.
Rational people
Make decisions by evaluating costs and benefits of marginal changes (incremental adjustments to an existing plan.
On "free Sundays" at the Musee de Louvre more than 25,000 people wait in line for 2+ hours on average to see the Mona Lisa. An econoimist observing this would conclude:
People who got in line felt the additional benefit of seeing the Mona Lisa was worth the time.
Suppose that when LeBron James graduated high school he had this choice before him: play pro basketball and earn $4 million a year or play pro football and earn $1 million a year. He could have also gone to college, earned an Economics degree, and earned $75,000 a year. If LeBron was assumed to be rational (and assuming his marginal costs are equal across all 3 choices), the decision he would make would be:
Play pro basketball because it has the highest marginal benefit, but face an opportunity cost of $1 million.
Scarcity
Unlimited wants and Limited resources.
Suppose you want to renew your driver's license. If you do it online, it costs $48 plus a convenience fee of $5, for a total amount spent of $53 dollars. If you go to the DMV office, it costs only $48, but you have estimated your fuel cost to be about $4.50, for a total amount spent of $52.50. What information are we missing before we can make a choice?
We forgot to include implicit costs, the time and hassle spent in the car and waiting in line.
Economics is the study of
how society manages it scarce resources.
U.S laws requiring that drivers wear seat belts have resulted in
little change in the number of driver deaths, but more accidents and more pedestrian deaths.