FMSC 290 Lecture Notes - Lecture 1: Opportunity Cost
1 May 2018
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Lecture- January 30, 2018
• Assumption
o Example: something that everyone accepts
o More of a good thing is better than less of it
▪ What about ice-cream???
• Axioms- speculate about the relationships between variables
o A=apple
o B=banana
o C=cranberry
o A>B
o B>C
o Therefore, assumption= A>C
▪ Hypothesis, theory, conceptual framework, model
• Collected data and tested the hypothesis A>C
o If you reject it, you go and collect more information
• Unlimited wants vs. limited resources = economics
• Economics does not discuss need
Ten principles of economics
• How people make decisions:
o Principle 1: people face trade-offs
▪ No such thing as a free lunch
▪ To get something that we like, we usually have to give up something else
that we also like
▪ Making decisions
• Trade off one goal against another
▪ Economics believe there is no such thing as “I had no choice”- there is
always an alternative/ fork in the road
▪ Trade-offs
• Students: time
• Parents: income
• Society:
o National defense vs. consumer goods (guns vs. butter)
o Clean environment vs. high level of income
o Efficiency vs. equality
▪ Efficiency
• Society getting the maximum benefits from its scarce resources
• Size of the economic pie
▪ Equality
• Distributing economic prosperity uniformly among the members of
society
• How the pie is divided into individual slices
o Principle 2: the cost of something is what you give up to get it
▪ People face trade offs
• Make decisions
o Compare cost with benefits of alternative
▪ Opportunity cost
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