ECON 210
Monday, January 12, 2009
CHAPTER 1
Economics = study of individual behavior an the resulting effects on the allocation of
scarce resources
Scarcity = resources are limited
Formal definition: exists when the quantity demanded exceeds the quantity supplied
at zero cost
What’s NOT scarce?
Pigeons/poop
Fresh air? (can be scarce in some instances)
Fresh water? (same as air)
Garbage/pollution
Categories of Scarce Resources
1. Natural resources (land, oil, etc.)
2. Labor (human labor, people)
3. Capital (physical capital, not financial capital)
a. Physical capital = buildings, equipment, machinery
(Money is not a resource. It doesn’t do anything for us.)
Scarcity implies we have to make choices. (tradeoffs)
People are rational.
Rational decisions:
If benefit ≥ cost = DO IT
If cost > benefit = DON’T DO IT
Economic cost (Opportunity Cost) = value of best alternative forgone (value of what you
gave up to get it)
Ex. 1) 3 job offers
$60,000
$80,000
$90,000
Assume jobs are all exactly the same, except for salary.
Benefit of $60,000 job = $60,000
Cost of $60,000 job =
$90,000 (total value of best alternative, not difference)
Cost > Benefit by $30,000
Benefit of $80,000 job = $80,000
Cost of $80,000 job =
$90,000
Benefit of $90,000 job = $90,000
Cost of $90,000 job =
$80,000
Benefit > Cost by $10,000
(rational decision)
Even “free” goods have costs.
Ex. 2) Citgo gas station
“$0.00”
Cost of gas = value of time
Ex. 3) “Free” pretzels
Private Market Systems (like the U.S.)
Characteristics:
1. Private property rights
2. Prices to determine who gets what
3. Exchange is voluntary (we can decide what, how much we want to buy)
*Positive Economic Analysis = FACTUAL
*Normative Economics = JUDGEMENT (what economic actions should be taken)
EXPLICIT vs. IMPLICIT vs. SUNK COSTS
“Costs” of College Education
 Tuition
explicit cost (monetary, we’re paying the school)
 Lost wages
implicit cost (we’re not paying anyone the lost wages)
 Books
explicit cost
 Room
sunk cost (not an economic/opportunity cost, you have to live somewhere)
 Board (Food)
sunk cost
 Entertainment sunk cost
 Clothing
sunk cost
 Car/Gas/Travel ?? depends on situation
Explicit cost = involves outlays of money
Implicit cost = does not involve explicit outlays of money, but the forgoing of some money
Sunk cost = an unavoidable cost that plays no role in decision-making (you have to pay it
no matter what you’re doing)
 Not included in economic costs because they are unavoidable.
Economic cost = explicit costs & implicit costs (nonsunk)
Ex) You buy a new H3 for $60,000
After you purchase it, the most you can sell it for is $45,000
$45,000 = cost of owning the H3
$15,000 = sunk cost (you can’t get it back)
MULTIPLE QUANTITIES
Compare benefits with costs for each quantity.
Marginal value
vs.
(marginal = additional)
marginal cost
Ex) Krispy Kreme, 12 donuts
Marginal value of 1st donut is greater than marginal value of 12th
MV  as MC 
(Assume that MV declines with each additional item)
(Assume MC increases with each item)
Marginal cost = amount of other goods that must be forgone to obtain one more unit of the
good
Marginal value = maximum amount an individual is willing and able to give up to acquire
one more unit of a good