ECONOMICS 101

Chapter 1

Economics is the study of how people manage resources.

- Decisions made by individuals and also by groups

- Resources are both physical objects and intangibles such as time

People's decisions can be studied using 4 main questions

1. What are their wants and constraints? Scarcity

2. What are their trade-offs? Opportunity costs
3. How will others respond? Incentives
4. What isn't everyone doing it? Efficiency

Scarcity
Scarcity is the condition of people's wants being greater than available Resouces.

- Individuals' resources: time and money

- Societies resources: factors of production, such as labor and technology.

Scarcity: constraints on obtaining everything wanted

Opportunity Cost
-Rational behavior dictates that when people choose between two things, the one with the greatest net
benefit, benefit minus cost, is chosen

- the benefits are easily calculated

-The cost includes both the direct cost and opportunity cost

The direct cost includes all associated costs

The opportunity cost includes the value of the next best alternative

Opportunity cost is based on people's valuations of the best alternative

-Opportunity cost: Given scarcity, peoples valuations of the best alternative

Marginal decision making

Incentives
- Incentive is something that causes a change in the tradeoffs that people face.

Positive incentive: makes people more likely to do something by lowering their opportunity
cost

Negative incentive (incentive): makes people less likely to do something by raising their opportunity
cost
Incentives: economic agents that can alter people's tradeoffs by providing incentives/disincentives *
when an incentive is provided on a large scale, the consequences can be extremely large.

Efficiency
Efficiency: resources are used to produce goods and services with the greatest economic value.
Sometimes economies do not operate efficiently

Efficiency: markets typically provide the highest value of goods/services

- Innovation: yest to be discovered innovations/ideas increase efficiency

- Market failure: people and firms may be prevented from capturing the benefits of the
opportunity or incur additional costs.
- Intervention: interventions in the economy cause transactions to not take place (most often
government polices)
- Goals other than profit: individuals and governments have goals other than profit

Problem solving tool box

Economic analysis requires:

- Theory to combine observations

- Scrutiny of both theory and observations before drawing to conclusions

These analyses distinguish between:

- Positive analysis: the way things are

- A the way things should be

Correlation and Causation

Correlation: a consistently observed relationship between two events