ECN 101: Introductory Microeconomics
1/16/2024
Chapter 1
1. What are the principles of how people make decisions?
2. What are the principles of how people interact?
3. What are the principles of how the economy as a whole works?
Principle 1 : People Face Tradeoffs
- the goal is to have a balance between the two in order to have an optimal level of
taxation
Principle 2: The Cost of something is what you give up to get it
- Opportunity cost; whatever must be given up to obtain it
- Ex. deciding to go to college if the benefits outweighs the opportunity cost of going to
college
Class Activity 1:
- Correct answer: C, value of your time when you could’ve been doing something else,
plus the actual costs associated with it – Benefit outweighs the cost
Class Activity 2:
- Correct answer: total cost of movie $18, total amount of money you would’ve made is
$30 ( value of your time 10x3)
- Total comparable cost?? The total money you spend by going to the movies: $48
Principle 3: Rational People Think At The Margin
- Assume people are rational
- Marginal changes: incremental adjustments to an existing plan
- A rational decision maker takes an action if and only if the marginal benefit of the action
exceeds the marginal cost
Class Activity 3:
- Pt.1 : yes, you would make 400, and it costs 300 to pay the wages so youd still be making
an extra 100
- Marginal cost : 300
- Additional benefit: 400
- Pt2. : you can if you want? It would be more worth it the more you watch the shows,
ALSO something about cost of personal time? PERSONAL CHOICE
- Marginal cost : 0
- Marginal benefit:
,1/18/2024
Chapter 1 – continued:
Principle 4: People Respond to Incentives
- Best incentive structure is PRICE, consumers will tend to buy less, and producers will
therefore sell less
- Everyone responds their own way, very sensitive to the price change = Very ELASTIC
Principle 5 : Trade Can Make Everyone Better Off
Principle 6: Markets are usually a good way to Organize Economic activity
- Market economy- interactions through markets, households, firms etc. cannot be done
without the cooperation of many different countries and business etc.
- “Invisible hand” : Milton Friedman : the market tends to be able to work well without
intervention
- Everyone cooperates together because they think they will be better off afterwards
Principle 7 : Governments can sometimes improve market outcomes
- Gov. role = enforce property rights
- People are less inclined to work, produce, invest, or purchase if large risk of their
property being stolen
- Market failure: fails to allocate society’s resources efficiently
- Causes:
1. Externalities- unintended (don’t care or don’t know) affect pos or neg. ex. pollution
Negative consumption externality: cigarettes/ guns (harder to buy, higher the
price)/
Positive consumption externality: solar panels (state cover 40% of cost of
installation)
Negative production externality: mining (oil or minerals) bc. It damages the
environment
Positive Production Externality: Electric cars (using less gas overall, better for
environment)
- If you leave the market alone, and has safety standards, the company will only look for
the best ways to profit, and therefore could wreak the environment
Why does the government interfere with the positive externalities?
To provide incentives, to encourage the positive externality (ex. solar panel
installation) ex. tax breaks, subsidize?
2. Market power – someone has too much power/influence (think monopoly)
- Kills competition, no price regulation etc.
- Government could interfere by: anti-trust law, blocking the merge of companies, raising
production tax (which makes the company rise the price of the item therefore shrinking
the market for the item)
Class Activity:
1. Public schools K-12: creates more jobs in the future, positive externality the more people
who are educated the more positive externalities
, 2. Workplace safety regulations: lack of price regulation, safety of workers are compromise,
may kill the incentive for people to work, may kill incentives to finish 4 yr degree
because they won’t be safe at work
3. Patent laws (allow drug companies to charge high prices for life-saving drugs): kill
competition, allows monopoly power generated by the gov. / without patent, there will
be no incentive for companies to be creative/inventive
Principle 8: a country’s standard of living depends on its ability to produce goods and services
- The disparity of the economies is caused by productivity of those countries
- Productivity can be impacted by: Corruptness, political stability, safety laws, labor
unions, competition from abroad, the equipment, technology etc.
Class Activity:
Muria is more productive at 20, while Zenya is 18 ( divide total output by number of hours to
see how much is being produced per hour)
1/16/2024
Chapter 1
1. What are the principles of how people make decisions?
2. What are the principles of how people interact?
3. What are the principles of how the economy as a whole works?
Principle 1 : People Face Tradeoffs
- the goal is to have a balance between the two in order to have an optimal level of
taxation
Principle 2: The Cost of something is what you give up to get it
- Opportunity cost; whatever must be given up to obtain it
- Ex. deciding to go to college if the benefits outweighs the opportunity cost of going to
college
Class Activity 1:
- Correct answer: C, value of your time when you could’ve been doing something else,
plus the actual costs associated with it – Benefit outweighs the cost
Class Activity 2:
- Correct answer: total cost of movie $18, total amount of money you would’ve made is
$30 ( value of your time 10x3)
- Total comparable cost?? The total money you spend by going to the movies: $48
Principle 3: Rational People Think At The Margin
- Assume people are rational
- Marginal changes: incremental adjustments to an existing plan
- A rational decision maker takes an action if and only if the marginal benefit of the action
exceeds the marginal cost
Class Activity 3:
- Pt.1 : yes, you would make 400, and it costs 300 to pay the wages so youd still be making
an extra 100
- Marginal cost : 300
- Additional benefit: 400
- Pt2. : you can if you want? It would be more worth it the more you watch the shows,
ALSO something about cost of personal time? PERSONAL CHOICE
- Marginal cost : 0
- Marginal benefit:
,1/18/2024
Chapter 1 – continued:
Principle 4: People Respond to Incentives
- Best incentive structure is PRICE, consumers will tend to buy less, and producers will
therefore sell less
- Everyone responds their own way, very sensitive to the price change = Very ELASTIC
Principle 5 : Trade Can Make Everyone Better Off
Principle 6: Markets are usually a good way to Organize Economic activity
- Market economy- interactions through markets, households, firms etc. cannot be done
without the cooperation of many different countries and business etc.
- “Invisible hand” : Milton Friedman : the market tends to be able to work well without
intervention
- Everyone cooperates together because they think they will be better off afterwards
Principle 7 : Governments can sometimes improve market outcomes
- Gov. role = enforce property rights
- People are less inclined to work, produce, invest, or purchase if large risk of their
property being stolen
- Market failure: fails to allocate society’s resources efficiently
- Causes:
1. Externalities- unintended (don’t care or don’t know) affect pos or neg. ex. pollution
Negative consumption externality: cigarettes/ guns (harder to buy, higher the
price)/
Positive consumption externality: solar panels (state cover 40% of cost of
installation)
Negative production externality: mining (oil or minerals) bc. It damages the
environment
Positive Production Externality: Electric cars (using less gas overall, better for
environment)
- If you leave the market alone, and has safety standards, the company will only look for
the best ways to profit, and therefore could wreak the environment
Why does the government interfere with the positive externalities?
To provide incentives, to encourage the positive externality (ex. solar panel
installation) ex. tax breaks, subsidize?
2. Market power – someone has too much power/influence (think monopoly)
- Kills competition, no price regulation etc.
- Government could interfere by: anti-trust law, blocking the merge of companies, raising
production tax (which makes the company rise the price of the item therefore shrinking
the market for the item)
Class Activity:
1. Public schools K-12: creates more jobs in the future, positive externality the more people
who are educated the more positive externalities
, 2. Workplace safety regulations: lack of price regulation, safety of workers are compromise,
may kill the incentive for people to work, may kill incentives to finish 4 yr degree
because they won’t be safe at work
3. Patent laws (allow drug companies to charge high prices for life-saving drugs): kill
competition, allows monopoly power generated by the gov. / without patent, there will
be no incentive for companies to be creative/inventive
Principle 8: a country’s standard of living depends on its ability to produce goods and services
- The disparity of the economies is caused by productivity of those countries
- Productivity can be impacted by: Corruptness, political stability, safety laws, labor
unions, competition from abroad, the equipment, technology etc.
Class Activity:
Muria is more productive at 20, while Zenya is 18 ( divide total output by number of hours to
see how much is being produced per hour)
