Introduction :

What does economics study?

-Fundamental Economic Problem : Resources are scarce.
Scarcity : Society has limited resources and therefore cant produce all the
goods and services people wish to have.
Economics studies how the society manages .

Two subfields of Economics

-Microeconomics
- The study of how households and firms make decisions and how
they interact specific markets and industries.

-Macroeconomics:
-The study of economy-wide phenomena.

Tradeoffs:
-People face tradeoffs:
-To get one thing, people need to give up another.

-What are the tradeoffs faced by the following ?

A. A member of congress deciding how much to spend on national
parks.
B. Your friend henry treats you to a movie.

Opportunity Cost:
-Opportunity cost: The value of the next best alternative that must be
foregone in order to undertake an activity.
-When you undertake an action there are many other things you could
possibly do.

Decision Making:
-The cost-benefit principle: Take an action if and only if the extra benefits
are the least as great as the extra costs.
-Example: You are selling your 1996 Mustang. You have already
spent 1000 on repars at the last minute the
 transmission dies. You can pay 600 to have it repaired or sell the car
as is. Blue book value is 6500 if transmission works
5700 if it doesn't. Should you have the transmission repaired?

Extra Cost=600
Extra benefit 6500-5700=800
Since extra benefit >extra cost
Should repair the transmission.

Don't forget opportunity cost!

-Example : Should you use your frequent flyer coupon to fly to Las Vegas
for spring break ? (Airfare=200;other costs=1000;willing to pay 1300 at
most fot the trip.)
A. You could use the coupon to attend to your sisters wedding in chicago
one week after spring break (airfare=400).
Benefit of the trip if coupon is used =1300
Cost of the trip if coupon used = 1000
Cost of the trip if coupon used =1000+400=1400
Do not use the coupon for the Las Vegas trip
Should you take the Las Vegas trip at all? Yes! SHould just purchase
an airplane ticket.

B. The coupon expires right after spring break. The value of the next best
alternative is 0
cost of the trip if coupon used =1000
should use the coupon for Las Vegas

Marginal Analysis:

-Marginal changes: Small, incremental changes to an existing plan of

action
Marginal cost: cost incurred due to a marginal change.
Marginal benefit: benefit obtained from a marginal change.

-Cost-Benefit principle: Make the marginal change if MB>MC otherwise do

not
Example:
A theatre has 1000 seats. the total cost of presenting a show is 10000. the
regular price of a ticket is 15.Now only 5 minutes remain before the next
show starts and
there are still some more tickets left. A staff proposes to sell the remaining
tickets at 5 each. Is this a good idea.
A common way of thinking:
Average cost per seat= 10000/1000=10.
so ticket has to be at least 10.

Marginal Benefit= $5
Marginal Cost= $0
Hence it is a good idea.