ECON 103 Chapter Notes - Chapter 2: Marginal Utility, Economic Model, Optimism
Chapter 2: Maximization (Pgs. 21-43)
Introduction
- For economists, there is only one source of motivation: greed
o The all it self-loe aiizatio
o Individuals are just trying to do their best under their circumstances
o But eooists at to tr to ie all ehaior as a effort to iproe oe’s situation
or well-being: alled utilit
- People try to get as much utility as possible given their circumstances
- Principle #1 - Maximization: All individuals are always motivated by greed
- Economics is about explaining behavior, not condoning actions or suggesting others
o Economists simply use this assumption because it works
- Maiizatio does’t ea that people are alas sart or orret
o Just eause people hae greed does’t ea that the’ll e right
o Greed does’t ea ore is alas preferred to less → non-satisfaction (nonsatiated)
o Economists often make assumptions of nonsatiation to make models work better, but it
is ot eessar, ad should’t e ofused ith aiization
- Greed is the edrok for eooists, its hat akes a arguet eooi
- A non-economic argument could be one based on altruism (non-greedy behavior)
- Motivation is not observable (why we have to assume the first principle), and any specific
behavior can always be explained away as consistent with greed or altruism
o Wh ould eooists at greed oer soe ier otiatio as a startig priiple?
- Belief in maximization has several impressive implications clearly observed around us
o Including: Scarcity, exchange, equilibrium
Part 2.1: Scarcity
- Scarcity is confused with rarity all the time
o Rarity means that something is in short supply
o To be scarce means that people want more of a good than is available when the good is
free; it may also be rare but does’t hae to e
- If the price of a good is zero and people want more than what is available, then that good is
scarce
- This concept is a result of greed
- Has several implications:
o Since the world is full of scarcity, there never will be enough of everything
o Everything is just not _____ enough, and its maximization at work in our lives
- From scarcity, we are faced with making choices
- Since there is never enough of the things we want, the only way we can get more of one thing is
to give up something else; this is unavoidable
Part 2.2: Equilibrium
- By equilibrium, economists mean a situation where no one wants to change their behavior
- An equilibrium will always be reached when individuals and firms maximize
o If people get together to increase their wealth, and the do’t full eploit eer
opportuit to do so, the the hae’t aiized
- Biggest example is driving on the freeway with 2 lanes
o The outcome of an equilibrium was the result of individuals trying to maximize
- Economists often analyze equilibrium with a oept alled the argi
o Margi eas a sall aout or a sall hage
o Indifference comes into play here, as people may be indifferent to taking action in
equilibrium (no marginal benefit to taking action)
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Document Summary
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