Class notes
Eco 201 - Chapter 1 notes
- Course
- ECO 201
- Institution
- Miami University Of Ohio
This is a comprehensive and detailed note that Covers proper intro to the course principles of microeconomics. U'll need it!!
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Economics is a social science that studies how individuals and societies allocatelimited resources to meet seemingly unlimited wants/demands.
Social science – uses scientific method to understand human behavior or
decision making
Allocate – to put a resource to a specific use/purpose
Fundamental problem is that wants/demands are unlimited, but the resources
available are limited.
Scarcity – all resources are necessarily limited in nature
Resources can be both tangible and intangible (i.e. time)
-Forced to make decisions b/c of the fundamental problem
Principle 1: People (and societies) face tradeoffs
Tradeoff – give up some of one thing for more of another
-People constantly face tradeoffs
Why? Scarcity
Principle 2: Cost of something is everything you give up to get it
Accounting cost – amount of money you give up to get something
Opportunity cost (OC) of an action – value that you place on your best
alternative to that action
Economic cost = accounting cost + OC
Principle 3: Rational people make decisions at the margin
A rational person acts in an attempt to make themselves as well off as possible given
the information available to them
Margin – small or incremental changes in a plan of action
Ex: sunk cost fallacy – letting sunk costs effect our decisions -> not rational
Sunk cost of an action – cost that has already been incurred and cannot be
recovered through the decision you make
Like spending money on something that won’t work but follow through
anyway b/c already spent
Principle 4: People respond to incentives (true but redundant)
Incentive – something that induces someone to act
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