ECON2105

What is economics?

We want more than what we want, but because of scarcity we must make decisions.

Our decisions re dependent on the incentives.

An incentive is a reward than encourages an action or a penalty that discourages an action.

What do we study in economics: PEOPLE

Core Principles of ECON:

Cost-Benefit Principle

·       Keep doing something until the marginal cost = marginal benefit

·       Only do something if the benefit is as large or larger than the cost

·       Compare intangible benefits to monetary cost by using willingness to pay

·       Convert each cost and each benefit into its monetary equivalent

·       Cost of buying and maintaining a car for work vs. Benefit of not spending money on an uber

Opportunity Cost Principle

·       Opportunity Cost is your next best alternative

·       All choices require a trade-off

·       Time is scarce, to come to class you must give up another activity (sleep, gym, etc)

·       Not all out of pocket costs are real opportunity costs

·       Ask “or what” to find the next best alternative

·       Sunk cost: cost in the past, cant be reversed

·       PPF – Production Possibilities Frontier: illustrates trade-offs between 2 choices

Marginal Cost Principle

·       What are the costs and benefits of doing one more of something

·       Keep on doing more as long as the marginal benefit is larger than the marginal cost.

·       Should I buy one more? à Is MB > MC? à yes? Keep going! No? stop!

Interdependence Principle

·       The choice you makes depends on your own choices, people/firms in a market, markets, and time

·       When any of those markets change, your best choice might change “what else?”

·       Your choices: If you take an econ class, you wont be able to take other classes at the same time.

·       Others’ choices: If another student takes the last spot, you’ll have to pick a different class.

·       Other markets. If you believe the skills you learn in ECON have become more valuable, you’ll choose different classes.

·       Future choices: Your decision to study Econ today changes the classes you meet the prerequisites for.