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Midterm 20 T/F + 30 MC
Mar. 8 week 2
Intro to Econ
Economics is about decision making
Why make decisions? We have endless desire, but not enough resources to satisfy. We are bound by
scarcity of resources.
Opportunity cost
Want to minimize opportunity cost.
Rational decision making
-> All economic decision making should be at the margin. Marginal. Not including the past(sunk).
Prof family go to movies. Spent time and money for taxi to get there, but the movies sold out. Wife
said to watch another movie whether you want to or not because they already spent time and money.
But these are sunk costs. And the marginal benefit I get out of a movie I dont want to watch is very
small and the marginal cost is fairly large. Rationally, you should just go home.
Panasonic PDP or LCD decision making. By the 2000s.
They chose to go for PDP, and their profits plummeted. They had a big pool in PDP. Have to consider
whether something is sunk or not.
Scarcity : limited nature of societys resources
Economics : study of how society manages its scarce resources, e.g.
How people decide what to buy, how much to produce, how many to hire, how society decides to
divide its resources
Protecting the environment requires resources ~~~
Can be controversial
Efficiency : when society gets the most from its scarce resources
Equality : when prosperity is distributed uniformly among societys members
Tradeoff: to achieve greater equality, could redistribute income from wealthy to poor. But this would
reduce incentive to work and produce -> shrink the size of the economic pie
So society has to choose -> efficiency or equity?
When we go for efficiency, equality decreases,
Go for equality, efficiency goes down, growth rate goes down
Cost of something is what you give up to get it
Opportunity ost = whatever must be given up to obtain it.
Ex: going to college for a year is not just the tuition, books, and fees, but also the foregone wages.
Seeing a movie is not just price of ticket, but eh value of the time you spend in theater.
The price of the next best good.
Rational people
Systematically and purposefully do the best they can to achieve their objectives.
Make decisions by evaluating costs and benefits of marginal changes, incremental adjustments to an
existing plan.
Ex: tuition vs. extra income
Principle 4
Rational People responds to incentives.
Incentive : something that induces a person to act, i.e. the prospect of a reward or punishment.

Active elearning
a. Yes. If I repair, I can sell it for 6500, instead of 5700. The difference is 800, larger than cost
of 600. The 1000 is sunk cost. MC is 600, but MB is 800. So Im willing to spend up to 800.
b. No. MB of fixing is 500. MC is 600.
4. you win #100 in a bball pool. You have a choice between spending the money now,and putting it
away for a year in a bank that pays 5% interest. What is the opportunity cost of spending the $100
now?
- $105. **not $5, $5 plus 100
- oc of putting in bank 100
*sunk cost it was already spent & you cant recover it.
Principle 5
Rather than being self-sufficient, people can specialize in producing one good and exchange it for other
goods.
Countries also benefit from trade and specialization
Get a better price abroad for goods they produce
Buyt other goods more cheaply from
6
Market : a group of buyers and sellers
Market sets price
organize economic activity -> what, how, how much, who
Invisible hand works through price system:
The interaction of buyers and sellers determines prices
Each price reflects the goods value to buyers and the cost of producing the good.
Prices guide self-interested households and firms to make decisions that, in many cases,
maximize societys economic well-being
Ex: petroleum price
If price goes down to much, producers have no incentive to produce any more.
Market economy allocates resources through the decentralized decisions of many households
and firms as they interact in markets.
Adam Smith each of these households and firms acts as if led by invisible hand <- the price
system.
But if the market is monopolized, market allocate resources efficiently.
7. Goverments can sometimes improve market outcomes
Important role of government : enforce property rights. (w. police, courts) mine and yours
People are less inclined to work, produce, invest, or purchase if large risk of their property is being
stolen.
Market failure : When the market fails to allocate societys resources efficiently
Causes of market failure
Externaliites : when the production or consumption of a good affects bystanders (ex:
pollution)
Market power : a single buyer or seller has substantial influence on market price (ex.
Monopoly) (power on price)
-> what if in a market, there is only one supplier, you might not have market power.
Under the condition that :
Public policy may promote efficiency.
Govt may alter market outcome to
If the markets distribution of economic well-being is not desirable,
Active learning 2

a.
b.
c.
d.
-> Discuss next tues
8. Countrys stand of living depends on its ability to produce goods & services
Huge variation in living standards across countries and over time.
Average income in rich countries is more than ten times average income in poor countries
U.S. standard of living today is about 8 times larger than 100 years ago
- The most important determent of living standard : productivity, the amount of goods and services
produced per unit of labor.
-> 50 years ago, in Korea we could only assemble FORd cars, but not we make our own cars. We can
mek 8 million Hyundai and kia combine.d
- productivity depends on :
- Other factors(e.g., labor unions, competition from abroad) have far less impact on living standards.
9 Prices rise when government prints too much money
Inflation :
Money growth is the ultimate source of inflation.
10 Society faces a short-run tradeoff between inflation and unemployment
In the short run (1-2 yrs)
Other factors can make this tradeoff more or less favorable, but the tradeoff is always
present.

Chapter 2
Economist play 2 roles
1. Scientist explain the world
2. Policy advisors try to improve the world
Economists employ the scientific method
-> assumptions & models (to simplify the real world)
1st model
The circular-flow diagram : a visual model of the economy, shows how dollars flow through markets
among households nd firms
2 types of actors : households, firms
2 markets : the market for good and services
The market for factors of production
Factors of production
PPF

given the available reosurces and the available technology

Expand ppf by 1. Expanding resources -> higher producivity