(1) People must make choices because resources are scarce.

Economics is a study of choice. Especially microeconomics studies choices

made by individuals, including consumers, producers, and government.
General impressions people have of economics usually involve money,
demand and supply. While these are definitely what interest economists,
economics more broadly deals with decision making which is choice.
In this chapter we will learn.
People have to make choice among available options, but why? In the picture,
why does the woman face a difficulty in making a choice? Yes, because the
resources are scarce.
What are some examples of resources? (List on the board.) Resources do not
always involve money. Any choice that arises due to scarcity of resources is
economic choice.

(2) The opportunity cost of an item is its true cost.

- Why do we want to count what we give up as well as monetary costs?
Because choice involves giving up an alternative option.
- Shipping example:
a. What is the opportunity cost of buying online instead of at the bookstore?
(Answer: sum of shipping charges plus benefit you give up by not
obtaining the book immediately from the bookstore minus the cost saving
you receive by buying online versus buying at the bookstore.)
b. Show the relevant choices for this student. What determines which of
these options the student will choose?
Buy from bookstore $65
Buy from first site (price $55), 1-day delivery $55 + $13.98 = $68.98
Buy from first site (price $55), 2-day delivery $55 + $08.98 = $63.98
Buy from first site (price $55), 3- to 7-day delivery $55 + $03.99 = $58.99
Buy from second site (price $57), 1-day delivery $57 + $13.98 = $70.98
Buy from second site (price $57), 2-day delivery $57 + $08.98 = $65.98
Buy from second site (price $57), 3- to 7-day delivery $57 + $03.99 = $60.99

(3) How much decisions require making trade-offs at the margin.

- Most decisions of interest to economists involve decisions at the margin.
(4) People usually respond to incentives to make themselves better off.
- When you try to predict how individuals will behave in an economic situation,
it is a very good bet that they will respond to incentives that is, exploit
opportunities to make themselves better off. Furthermore, individuals will
continue to exploit these opportunities until they have been fully exhausted.
In fact, the principle that people will exploit opportunities to make themselves
better off is the basis of all predictions by economists about individual
behavior.
- MBA Up vs. law degrees Down: We can expect more students go to business
school than law school. As long as earnigs of MBA are higher, this
phenomenon will continue.
- Economists are skeptical of attempts to change peoples behavior that do not
change their incentives.
(5) There are gains from trade.
- When do you think people trade and why? (When it is mutually beneficial. Trade
would not take place if both sides did not benefit.)
- In a market economy, individuals engage in tradethey provide goods and
services to others and receive goods and services in return.
- There are gains from tradepeople can get more of what they want through trade

than they could if they tried to be self-sufficient.

This increase in output is due to specialization each person specializes in the task that he
or she is good at performing.

(6) Because people respond to incentives, markets move toward equilibrium.

- People change their behavior and choice responding to incentives until all the
opportunities to make themselves better off are exhausted, which is nothing
but equilibrium.
- Example of lines at the supermarket.
(7) Resources should be used as efficiently as possible to achieve societys goals.
- As said, in essence, economics is all about allocating scarce resources. And
economists say that an economys resources are used efficiently when they
are used in a way that has fully exploited all opportunities to make everyone
better off.
- In other words, an economy is efficient if it takes all opportunities to make
some people better off without making other people worse off.
- So, efficiency is no waste situation.
- Classroom example.
(8) Because people usually exploit gains from trade, markets usually lead to
efficiency.
- This is about how to achieve efficiency.
(9) When markets dont achieve efficiency, government intervention can
improve societys welfare.
- But what if market does achieve efficiency?
Explain how each of the following situations illustrates one of the five principles of
interaction.
a. At a college tutoring co-op, students can arrange to provide tutoring in
subjects they are good in (like economics) in return for receiving tutoring in
subjects they are poor in (philosophy).
b. The local municipality imposes a law that requires bars and nightclubs near
residential areas to keep their noise levels below a certain threshold.
c. On eBay books of a given title with approximately the same level of wear and
tear sell for about the same price.
Which of the nine principles?

(10) One persons spending is another persons income.

(11) Overall spending sometimes gets out of line with the economys productive
capacity.
(12) Government policies can change spending.
Which of the nine principles?
People in Europe drive smaller cars than in the United States because the price of
gasoline is higher. (Principle #4: People respond to incentives and exploit
opportunities
to make themselves better off.)
You decide to take only three instead of four classes this semester due to your busy

work schedule. (Principle #3: How much is a decision at the margin.)

If you take the babysitting job on Friday night, then you will be unable to go to the
party with your friends. (Principle #2: The true cost of something is its opportunity
cost.)
Jack and Jane are roommates. Jack makes breakfast for both of them each day,
and Jane makes dinner for both of them each day. (Principle #5: There are gains
from trade.)
In most cases, the open checkout lanes at the grocery store all have the same
number of customers waiting to pay for their items. (Principle #6: Markets move
toward equilibrium.)