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1、McGraw-Hill/Irwin Copyright 2011 by The McGraw-Hill Companies, Inc. All rights reserved.Chapter 1: Thinking Like an Economist1. Explain and apply the Scarcity Principle 2. Explain and apply the Cost-Benefit Principle 3. Explain and apply the Incentive Principle 4. Discuss the pitfall of measuring co
2、sts and benefits as proportions rather than as absolute dollar amounts 5. Discuss the pitfall of ignoring implicit costs 6. Discuss the pitfall of failing to weigh costs and benefits at the marginThe Scarcity Principle2The Cost-Benefit Principle Take an action if and only if the extra benefits are a
3、t least as great as the extra costs Costs and benefits are not just money3Economic Surplus The economic surplus of an action is equal to its benefit minus its costs4Opportunity Cost Opportunity cost is the value of what must be foregone in order to undertake an activity Consider explicit and implici
4、t costs Examples: Give up an hour of babysitting to go to the movies Give up watching TV to walk to town Caution: NOT the combined value of all possible activities Opportunity cost considers only your best alternative5Economic Models Simplifying assumptions Which aspects of the decision are absolute
5、ly essential? Which aspects are irrelevant? Abstract representation of key relationships The Cost-Benefit Principle is a model If costs of an action increase, the action is less likely If benefits of an action increase, the action is more likely6Three Decision PitfallsEconomic analysis predicts like
6、ly behavior Three general cases of mistakes 1. Measuring costs and benefits as proportions instead of absolute amounts 2. Ignoring implicit costs 3. Failure to think at the margin7Pitfall #1Measuring costs and benefits as proportions instead of absolute amount Would you walk to town to save $10 on a
7、 $25 item? Would you walk to town to save $10 on a $2,500 item?8Pitfall #2Ignoring implicit costs Consider your alternatives The value of a Frequent Flyer coupon depends on its next best use Expiration date Do you have time for another trip? Cost of the next best trip9Pitfall #3Failure to think at t
8、he margin Sunk costs cannot be recovered Examples: Eating at an all-you- can-eat restaurant Attend a second year of law school10Marginal Analysis Ideas Marginal cost is the increase in total cost from one additional unit of an activity Average cost is total cost divided by the number of units Margin
9、al benefit is the increase in total benefit from one additional unit of an activity Average benefit is total benefit divided by the number of units11Normative and Positive Economics Normative economic principle says how people should behave Gas prices are too high Building a space base on the moon w
10、ill cost too much Positive economic principle predicts how people will behave The average price of gasoline in May 2008 was higher than in May 2007 Building a space base on the moon will cost more than the shuttle program12Incentive Principle13Microeconomics and Macroeconomics Microeconomics studies
11、 choice and its implications for price and quantity in individual markets Sugar Carpets House cleaning services Microeconomics considers topics such as Costs of production Demand for a product Exchange rates Macroeconomics studies the performance of national economies and the policies that governmen
12、ts use to try to improve that performance Inflation Unemployment Growth Macroeconomics considers Monetary policy Deficits Tax policy14Economics Is Choosing Focus in this course is on a short list of powerful ideas Explain many economic issues Predict decisions made in a variety of circumstances Core Principles are the foundation for solving economic problems15
