Summary ECO1006F Exam Notes: Textbook and lecture summaries (Ch1-6)

Chapter 1

,Definitions
Scarcity
 Wants exceed resources
o The available resources needed to satisfy the needs
 Called problem of scarcity
o What economics deals with
o This is the starting point for economics


Economics
Definition
Definition 1
 Social science that both
o Deals with the problem of scarcity
o Studies how rational individuals, businesses, and government
make rational decisions and organize themselves.
 Also deals with
o Optimization
o Influences
o Constraints

Definition 2
 The social science that studies the choices made by
o Individuals
o Businesses
o Governments
o Entire societies make
 As they cope with
o Scarcity
o The incentives that influence those choices
o The arrangements that coordinate those choices

,Micro Economics
Definition
 The study of
o The choices made by
 Individuals
 Businesses
o The way these choices
 Interact with the government
 Are influenced by governments
Explained
 Choices made on an individual level
o Within a business
 Macro affects micro
 Government is an economic agent
o Little business
 Buys stationary

Marco Economics
Definition
 The study of the aggregate/total effects
o On both
 The national economy
 The global economy
o Caused by choices made by
 Individuals
 Businesses
 Governments
Explained
 Micro effects macro
 Total effect of decisions
o On the nation
o Worldwide


Interest
Self-interest
 The choices that are best for the individual who makes them.

Social interest
 The choices that are best for society as a whole

,Economic Ideas
Summary
6 Ideas define the economic way of thinking
 A choice is a tradeoff
 People make rational choices by comparing benefits and costs
 Benefit is what you gain from something
 Cost is what you must give up to get something
 Most choices are “how much” choices made at the margin
 Choices respond to incentives


Tradeoff
Definition
 An exchange
o Giving up one thing
o In order to get something else

Example
 Giving up one thing
o A night out partying
 In order to get something else
o A night studying

,Rational Choice
Definition
 A choice that
o Uses the available resources
o To best achieve the objective
 Of the person making the choice
 Only that person is relevant
 Their wants
 Their needs

How they are made
 By weighing the costs VS benefits
o Analysing the margins
 See below for details on margins
o Benefit= Gain

Good rational choice
 Costs are less than benefits
 Marginal benefits exceed marginal costs


Benefit
Definition
The benefit of something is the gain or pleasure that it brings

Measured as
 The most a person
o Is willing to give up
o In order to get something

,Opportunity cost
Definition
 The loss of potential gain
o From other alternatives
o When one alternative is chosen

Idle cash balances
 Represent an opportunity cost
 In terms of lost interest

Measuring Opportunity Cost
 Benefit measured by what you are willing to give up for it
 The opportunity cost of X= the best thing you must give up to get X
Example
 Have R10
 Can buy a coke or Fanta
o Cost R7 each
 Buying one makes buying the other impossible
o That’s the opportunity cost

,Margin
Definition
Making a choice at margin
 A choice is by
o Comparing all the relevant alternatives both
 Systematically
 Incrementally
Explained
 Talking about “one unit extra”
o One extra laptop VS one extra employee
 Weigh up the costs & benefits of each
 To make a rational decision

Marginal Cost
Definition
 The opportunity cost
o That arises from a one-unit increase in an activity
 The marginal cost of X
o Is what you must give up
o In order to get one additional unit of X

Marginal Benefit
Definition
 The benefit
o That arises from a one- unit increase in an activity.
 The marginal benefit of X
o Is what you are willing to give up
o In order to get one additional unit of X


Incentive
Definition
 A reward or a penalty that either
o Encourages an action
 Marginal benefits
o Discourages an action
 Marginal costs

Incentives change
 Changes in either
o Marginal benefit
o Marginal cost
 Changes the incentives
 Can result in a different choice

, Sunk cost
Definition
 Cost one doesn’t consider when making the decision
 Irreversible

Examples
Example 1
 Movie at theatre
 Bad movie
 Already paid
o Can’t get money back
 Therefore it is the sunk cost
Example2
 Have 2 options
o Each option has a cost
 Choose option 1
o Pay option1’s cost
 Then decide to do option 2
o Realize its better
 Option1’s cost is the sunk cost