Notes on Economics
Chapter 1 – The Five Foundations of Economics
• Scarcity: The limited nature of society’s resources
• Economics: The study of how people allocate their limited resources to satisfy their unlimited wants
• Time, energy, and financial cost toward acquiring materials
• Air and gravity are examples of things we don’t worry about, or aren’t scarce
• The ability to look at the benefits of the activity and weigh it against the cost is thinking like an economist
• Making choices is all about comparing cost and benefits rationally
• People who use cost and benefits do (and don’t) make rational choices
• Does the fact that some people make apparently irrational choices invalidate the rationality assumption in Econ? No.
• Irrational people make unpredictable decisions
• Economic models try to be applied to irrational people too
• We focus on rational acts to understand irrational acts
• No one has consistent behavior, even if the people are rational
• People value variety and change -> Don’t always stay with the same choice
• Can change behavior by altering incentive structure where they already make their choices in
• Positive and negative incentives (Ex: grades)
• Direct and indirect incentives [Ex: born on July 1 (in Australia, they give $1000 to help pay for kids)]
• Patents give companies an incentive to research to come up with their own idea (right incentives -> more innovations)
• Life is about trade offs (Ex: college vs. working / cleaner environment vs. more production)
• Opportunity cost: Highest valued alternative that must be given up to engage in an activity -> “what you give up” -> WHAT IF question
• Ex: The opportunity cost of going to the ER is higher during a Red Sox game; the amount of people during a Red Sox game going to the ER is low
• Marginal Thinking: Evaluate whether the benefit of one more unit of something is greater than its cost
• Ex: It takes more energy to rid a dust bunny under the couch, but the benefit is low, as
• Scarcity: The limited nature of society’s resources
• Economics: The study of how people allocate their limited resources to satisfy their unlimited wants
• Time, energy, and financial cost toward acquiring materials
• Air and gravity are examples of things we don’t worry about, or aren’t scarce
• The ability to look at the benefits of the activity and weigh it against the cost is thinking like an economist
• Making choices is all about comparing cost and benefits rationally
• People who use cost and benefits do (and don’t) make rational choices
• Does the fact that some people make apparently irrational choices invalidate the rationality assumption in Econ? No.
• Irrational people make unpredictable decisions
• Economic models try to be applied to irrational people too
• We focus on rational acts to understand irrational acts
• No one has consistent behavior, even if the people are rational
• People value variety and change -> Don’t always stay with the same choice
• Can change behavior by altering incentive structure where they already make their choices in
• Positive and negative incentives (Ex: grades)
• Direct and indirect incentives [Ex: born on July 1 (in Australia, they give $1000 to help pay for kids)]
• Patents give companies an incentive to research to come up with their own idea (right incentives -> more innovations)
• Life is about trade offs (Ex: college vs. working / cleaner environment vs. more production)
• Opportunity cost: Highest valued alternative that must be given up to engage in an activity -> “what you give up” -> WHAT IF question
• Ex: The opportunity cost of going to the ER is higher during a Red Sox game; the amount of people during a Red Sox game going to the ER is low
• Marginal Thinking: Evaluate whether the benefit of one more unit of something is greater than its cost
• Ex: It takes more energy to rid a dust bunny under the couch, but the benefit is low, as