Econ1101 Summ Ch1-12 2013s1

Chapter One – Thinking As An Economist

Objectives –

* Define Economics – Economics is the study of how people make choices in conditions of scarcity, and of the results upon society. Economics develop models, to represent reality, to help draw correct conclusions about decisions.

* Recognise economic decisions(Defn in 1.1) and define an economic naturalist – one who recognises economic decisions around them, who can apply these skills to explain our decisions, and understand the costs and benefits for groups, individuals and society. From lecture, “one who uses basic economic concepts to make sense of observations on all aspects of everyday life”.

* Define the scarcity principle(definition in 1.1) and explain its implications for decision making – as resources are scarce, by choosing one thing, you forgo the choice of another. Eg – type of lunch, recreational activities. (From slide) “Although we have boundless needs and wants, the resources are limited → having more of one thing usually means having less of another” Resources – land, labour, capital, enterprise.

* Define the cost benefit principle and apply it to simple economic decisions

“An individual/firm/society should take an action, if the extra benefits> or = to extra costs.”

Going out for pizza/study for test choice → explicit cost of pizza ($10) and Implicit cost of worse test mark (5/10 marks)

*Opportunity cost=cost forgone=real cost – value of the next-best alternative to taking an action. Eg- pizza →$10 and 10 marks is opportunity cost.

*Economic surplus is the benefit of taking any action minus its cost. The goal is to maximize its surplus. Eg- walk into town to save $10 on video games. Walking costs $5 → surplus =$5

*Reservation Price – highest price one is willing to pay; can be different from market commodity price.

* List four common pitfalls that people encounter when making economic decisions and avoid them yourself by;

* - measuring costs and benefits as...