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First: Crashers
If you did not sign the “crash” list on Monday, you are not able to add this Econ 1 lecture
If you were here Monday and have not let me know that you are here, please do so now
Why am I taking Econ 1? Hopefully, you have an interest in
economics If not, I hope to teach you
something that you will find important to your life later on Lessons learned in this class could help
you make good decisions later on Good decisions are usually correlated with
more money
Poker and economics Opportunity cost
Don’t ask “what will make me money?” Ask “what will make me the most money?” For poker players, you can read more about
opportunity cost at http://www.cardplayer.com/author/article/all/248/9463
Game theory Understanding your opponents can give you
a big edge in life
Last time… Introduction to the 7 core principles of
economics Scarcity Cost-benefit analysis Incentives matter Comparative advantage Increasing opportunity cost Equilibrium Efficiency
Today: Begin Unit 1Basics of supply and demand
Why is economics important? A few tools necessary to be a good
economist Thinking like an economist Marginal benefit Marginal cost Working with graphs
Thinking like an economist
Examples Surfing
Health insurance Driving to work
Find fastest way to work Sugar prices in the U.S.
See F/B
How to successfully think like an economist Come to lecture Read the text Think, think, think Try to understand the “Economic
Naturalist” problems Ask questions in lecture, section, and
office hours Understand what is going on before
moving to the next topic
Why is economics important to study?
Study people’s and firms’ choices Theorize general tendencies of
behavior Find ways to increase efficiency of
the economy If there are more goods and
services available, then there is “more of the pie” to go around
What is fair? Economists generally do not study
this, since it is difficult to determine what is “fair”
Instead, when possible, economists often try to find situations in which some people can be made better off without hurting others These situations are called Pareto
improvements
Potential Pareto improvements
International trade Removal of complaints from
overbooked flights Replacing pollution controls with
marketable permits (advanced idea)
Improving property rights
What are some things that economists study?
Individual markets (microeconomics)
An economy as a whole (macroeconomics)
This class addresses microeconomic issues
Individual topics include: Highway
congestion Marriage markets Education The environment Labor markets Health International trade
Marginal analysis
One of the most important ideas in economics
When you hear “marginal,” think “one additional unit” Example: F/B describe marginal benefit
as “the increase in total benefit that results from carrying out one additional unit of an activity” (p. 12)
Marginal analysis
An example You have $10 available to buy energy
drinks today Each energy drink costs you $2
Any money left over can be used to buy other items
Should you buy 5 energy drinks today?
Solution
Buy an additional energy drink if Marginal Benefit (MB) exceeds Marginal Cost (MC)
If MB = MC, you are indifferent about buying an additional energy drink
If MB < MC, you will not buy an additional energy drink
Your benefit schedule
# of drinks Total benefit ($) MB ($) Avg. benefit
0 0 N/A5
1 5 53
2 8 42.5
3 10.5 3.51.5
4 12 3-1
5 11 2.2
What should we do?
# of drinks Total benefit ($) MB ($) Avg. benefit
0 0 N/A5
1 5 53
2 8 4
2.53 10.5 3.5
1.54 12 3
-15 11 2.2
We should buy the third energy drink since MB > MC (2.5 > 2)
We should not buy the fourth energy drink since MB < MC (1.5 < 2)
Note that we are NOT maximizing average benefit or total benefit
Surplus
# of drinks Total benefit ($) MB ($) Avg. benefit
0 0 N/A5
1 5 53
2 8 4
2.53 10.5 3.5
1.54 12 3
-15 11 2.2
Economics surplus is benefit minus cost
Marginal surplus 1st unit: 5 – 2 = 3 2nd unit: 3 – 2 = 1 3rd unit: 2.5 – 2
= .5 Total surplus for
consuming 3 units: $4.50
Thinking like an economist: MB/MC and grades Your choices over the next 10
weeks will help determine the grade you get in this class “Should I choose to spend a lot of time
studying and try to get a good grade?” “Should I choose to sleep in and miss
lecture?” Choices like these will help
determine your grade
Working with graphs Some reminders
of graphs Label axes Label curves Label dollar
amounts, quantities, etc., when needed
Working with graphs: Slope
Supply: Slope is rise (red line) divided run (green line), or 6 divided by 4, which is 1.5 here