EC120 CHAPTER 1 NOTES
1.1 A PRINCIPLED APPROACH TO ECONOMICS
The Economic Approach
Economics can be described as the study of people “in the ordinary business of life”. The same
principles used to analyze business descisions canbe used in decisions made in life.
A systematic Framework for Making Decisions
-
Individual decisiosn are the foundation of all economic forces
Our decisions affect what’s made, who gets it, anw if it yields fair outcomes
The four core principles provide a systematic framework for analyzing individual
decisions
1. Cost benefit principle
2. The opportunity cost principle
3. Marginal Principle
4. Interdependence principle
1.2 THE COST BENEFIT PRINCIPLE
Principle says that costs and benefits are the INCENTIVES that shape decisions. Befor emaking a
decision u should
- Evaluate the costs and beenifts
- Persure that choice if the benfits are as large as the costs
Qualifying Costs and Benefits
Ex. Buying a $3 coffee
The principe says that u should buy the coffee if the benefit is at least as large as the cost. Cost
is $3 but what is the benefit? Its hard to measure.
Concert Costs and Benefits into Dollars by evaluasting your willingness to pay
Trick: convert each cost and benefit into its equivalent in money – which means asses your
willingness to pay. Ask yourself what is the most you’d be willing to pay to obtain a particular
benefit or avoid a particular cost
Are you willing to pay $5 for coffee?if not, $4 or $3. If the most your willing to pay is $4, then
this is the dollar value of the benefits you receive from that coffee. To quantify the benefit you
get from a cup of coffee is up to how delicious you find it, not the price on the menu.
Willingness to pay: $4
Actual price $3
We converted the benefit and the cost into the same unit (money). In this case, benefits exceed
cost so you should buy the coffee
Money is a measuring stick, NOT the objective
Some people believe it is unhealthy to convert benefit and cost into their monetary equivalents
as it suggest that money is the only thing that matters. The cost benefit principe allows you to
compare a wide variety of costs and benefits, taking into account financial and nonfinancial (ex.
The degree of satisfaction you get from a cup of coffee, time and effort it takes getting to cafe)
aaspects.
Interpreting Data
EC120 LECTURE 1
Key Words
Economic surplus = total benefits – total costs that flow from a decision (improve
well-being)
Cost Benefit – benefits equal to or greater than cost
Economic surplus = total benefits – total costs that flow from a decision (improve
well-being)
Avoid framing effects: using cost and benefits to influence decisions.. is it worth
it? (broccoli vs cauliflower)
Biking to Work
Time period: Sep 2023
Cost
- Time: 2 min x2x 20times
- $1.80/per minute
- $144/month
- Energy from Biking is a lot more
then what it would take to drive
- Risk and uncertainty of weather
issues (rain, snow). This can lead
to taking the bus ($3 x 2=$6)
- Might have to buy a bike if not
already owned – SUNK COSTS so
not included
-
Alternative: driving
Benefit
- Don’t have to spend money on
gas so saving $30/month
(Important as you can spend
that money elsewhere)
Carbon tax – account for the fact that
our carbon emissions effect others
around us when we r thinking and
doing action for oureslevs
- Get exercise
- Cycling class is the next best
alternaitve $20 for 45 minutes
$6/trip x 40=$240 (but what is
my willingness to pay for this?)
- No parking = $45/ a month
saved on parking space
- Car, maintenance, insurance –
SUNK COSTS (still going to own
car so regardless of if I drive it or
bike, I still will be paying these
fees)
What we accounted for
Cost- benefit relative to alternative
Time is valuable - opportunity cost
Driving, not buying car – marginal (it doesn’t require
making abig decision like buying a car)
Road congestion, parking – interdependence (going to
take longer to get there wit bike and to park)
Opportunity cost – the next best option you had to give up
- Time is a scarce resource, we need to decide what to do with these
opportunity cost considerations and there are alternatives
Marginal – incremental
Interdependence- other choices and decisions
MB=MC
Marginal benefit = marginal cost
As long as benefit is greater, you will choose that one.
Deciding how long to study – ex. Stopping studying when u cant study anymore as
the benefit is less then the cost