1、Chapter 1: Thinking Like an Economist,Explain and apply the Scarcity Principle Explain and apply the Cost-Benefit Principle Explain and apply the Incentive Principle Discuss the pitfall of measuring costs and benefits as proportions rather than as absolute dollar amounts Discuss the pitfall of ignor
2、ing implicit costs Discuss the pitfall of failing to weigh costs and benefits at the margin,1-2,The Scarcity Principle,1-3,The Cost-Benefit Principle,Take an action if and only if the extra benefits are at least as great as the extra costs Costs and benefits are not just money,1-4,Economic Surplus,T
3、he economic surplus of an action is equal to its benefit minus its costs,1-5,Opportunity Cost,Opportunity cost is the value of what must be foregone in order to undertake an activity Consider explicit and implicit costs Examples: Give up an hour of babysitting to go to the movies Give up watching TV
4、 to walk to town Caution: NOT the combined value of all possible activities Opportunity cost considers only your best alternative,1-6,Economic Models,Simplifying assumptions Which aspects of the decision are absolutely essential? Which aspects are irrelevant? Abstract representation of key relations
5、hips The Cost-Benefit Principle is a model If costs of an action increase, the action is less likely If benefits of an action increase, the action is more likely,1-7,Three Decision Pitfalls,Economic analysis predicts likely behavior Three general cases of mistakes Measuring costs and benefits as pro
6、portions instead of absolute amounts Ignoring implicit costs Failure to think at the margin,1-8,Pitfall #1,Measuring costs and benefits as proportions instead of absolute amount Would you walk to town to save $10 on a $25 item? Would you walk to town to save $10 on a $2,500 item?,1-9,Pitfall #2,Igno
7、ring implicit costs Consider your alternatives The value of a Frequent Flyer coupon depends on its next best use Expiration date Do you have time for another trip? Cost of the next best trip,1-10,Pitfall #3,Failure to think at the margin Sunk costs cannot be recovered Examples: Eating at an all-you-
8、can-eat restaurant Attend a second year of law school,1-11,Marginal Analysis Ideas,Marginal cost is the increase in total cost from one additional unit of an activity Average cost is total cost divided by the number of units Marginal benefit is the increase in total benefit from one additional unit
9、of an activity Average benefit is total benefit divided by the number of units,1-12,Normative and Positive Economics,Normative economic principle says how people should behave Gas prices are too high Building a space base on the moon will cost too much,Positive economic principle predicts how people
10、 will behave The average price of gasoline in May 2008 was higher than in May 2007 Building a space base on the moon will cost more than the shuttle program,1-13,Incentive Principle,1-14,Microeconomics and Macroeconomics,Microeconomics studies choice and its implications for price and quantity in in
11、dividual markets Sugar Carpets House cleaning services Microeconomics considers topics such as Costs of production Demand for a product Exchange rates,Macroeconomics studies the performance of national economies and the policies that governments use to try to improve that performance Inflation Unemp
12、loyment Growth Macroeconomics considers Monetary policy Deficits Tax policy,1-15,Economics Is Choosing,Focus in this course is on a short list of powerful ideas Explain many economic issues Predict decisions made in a variety of circumstances Core Principles are the foundation for solving economic problems,
