tailieunhanh - Lecture Economics: Chapter 1 - Dean Karlan, Jonathan Morduch

Chapter 1 - The power of economics. In this chapter you will learn: Explain the economic concept of scarcity, explain the economic concepts of opportunity cost and marginal decision making, explain the economic concept of incentives, explain the economic concept of efficiency, distinguish between correlation and causation, list the characteristics of a good economic model, distinguish between positive and normative analysis. | Chapter 1 The Power of Economics © 2014 by McGraw‐Hill Education 1 What will you learn in this chapter? • Concepts of – Scarcity. – Opportunity cost and marginal decision making. – Incentives. – Efficiency. • How to distinguish between – correlation and causation. – Positive and normative analysis. • Characteristics of good economic modeling. © 2014 by McGraw‐Hill Education 2 What is economics? • Economics is the study of how people manage resources. • Decisions made by individuals and also by groups. • Resources are both physical objects and intangibles such as time. • Economics is divided into two broad fields: – Microeconomics: study of individuals and firms. – Macroeconomics: study of the economy on a regional, national, or international scale. © 2014 by McGraw‐Hill Education 3 1 Choices and rational behavior • Economists assume that people – Compare all available choices. – Purposefully behave in the way that will best achieve their goals, called rational behavior. • Peoples’ decisions can be studied using four main questions: 1. What are their wants and constraints? 2. What are their trade‐offs? 3. How will others respond? 4. Why isn’t everyone doing it? © 2014 by McGraw‐Hill Education 4 Scarcity • People make decisions aimed at getting the things they want. • People want a lot of things, but they are constrained by limited resources. • Scarcity is the condition of peoples’ wants being greater than available resources. – Individuals’ resources: time and money. – Societies’ resources: factors of production, such as labor and technology. © 2014 by McGraw‐Hill Education 5 Opportunity cost • Every decision in life involves weighing the trade‐ off between costs and benefits. – Rational behavior dictates that when people choose between two things, the one with the greatest net benefit (benefits minus costs) is chosen. • The benefits are often easily calculated. • The costs include both the direct cost and opportunity cost. – .