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