ECON 1 Lecture Notes - Lecture 2: Root Mean Square, Invisible Hand, Marginal Cost
ECON 1 Winter 2017
Chapter 1. Ten Principle of Economics
Look for the answer for these questions:
-What Kind of questions does economics address?
-What are the principles of how people make decisions?
-What drives our decisions ?
-What are the principles of how people interact?
-What are the principles of how the economy as a whole works?
How people participate in Market.
Different clothing items ( lots of different decisions)
Math form to analyze these decisions
What Economic is all About
SCARCITY: The limited nature of society’s resources
ECONOMICS: The study of how society manages its scarce resources
-How people decide what to buy
-How much to work, save and spend
-How firms decide how much to produce and how many workers to hire
-How society decides how ti divide its resources between national defense,
consumer goods, protecting the environment, and other needs
Given that resources are scarce (water, oil)
How does E decides how to distribute the resources = invisible can
i.e. How much you should hire for a work,
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Idea 1: Incentive Matter
INCENTIVE: something that induces a person to act (i.e. the prospect of a reward or
punishment)
-Rational people respond to incentives
-People respond to incentives in predictable ways
-Self-interest is an important incentive in economics
Examples:
-When gas prices rise, consumers buy more hybrid cars and fewer gas guzzling
SUVs
-Then cigarette taxes increase, teen smoking falls
-Ralph Nader’s Book (1960): Unsafe at Any Speed
1. If you are here in class, and the incentive is that the class translate knowledge and
got A.
2. Transportation of LA (painful): what will happen is they increase the price for gallon of
gas = change behavior = looking for public transportation
3. Seatbelt to decrease car accident. Rate decrease, but people feel that that is safer
and they start to drive faster = dead increases again (unintended consequence)
Idea 2: Market are usually a Good way to Organize Economic Activity
MARKET: A group of buyers and sellers (need not be in a single location)
“Organize Economic Activity” means determining
-What goods to produces
-Hot to Produce them
-How much of each to produce
-Who gets them
*We let the market to decide = dynamic between prices and demand = market
economy= allocation of resources between seller and buyers
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Document Summary
Different clothing items ( lots of different decisions) Economics: the study of how society manages its scarce resources. How much to work, save and spend. How rms decide how much to produce and how many workers to hire. How society decides how ti divide its resources between national defense, consumer goods, protecting the environment, and other needs. How does e decides how to distribute the resources = invisible can i. e. how much you should hire for a work, Incentive: something that induces a person to act (i. e. the prospect of a reward or punishment) People respond to incentives in predictable ways. Self-interest is an important incentive in economics. When gas prices rise, consumers buy more hybrid cars and fewer gas guzzling. Then cigarette taxes increase, teen smoking falls. Rate decrease, but people feel that that is safer and they start to drive faster = dead increases again (unintended consequence)