Chapter 1: The Five

Foundations of Economics
The dismal science?
What is economics?
The five foundations of economics

Welcome to Econ 2202
Making choices under conditions of
uncertainty.
What stocks should I buy for my portfolio?
How many bagels should I eat?
How many hours should I study for
Biology?
How many cars should I steal?
Economics can be categorized as:
Microeconomics looking at individuals
Macroeconomics looking at broader,
economy-wide issues
Scarcity
Unlimited wants but
limited resources
Individuals
resources
Time
Money
Societys resources
Natural resource

Labor
Physical capital
Human capital
Entrepreneurship

Time is Money
Choices
Because all
societies face
scarcity, choices
must be made.
Individuals make
thousands of
choices in a day.
Societys choices
What to produce?
How to produce?
Who gets it?
Incentives
Decisions are
made by
responding to
incentives.
Positive and
negative incentives
both encourage a
response.
Some responses are
unintended.
Incentives can directly
impact individuals
behavior, but also
encourage behavior
either indirectly or in
an unintended way.
Real Estate Agents
Principle of Opportunity Cost
Scarcity requires the
need to make choices.
Choices require that
something be given up
Opportunity Cost: value
of a resource in its next
best use.
People subconsciously
weigh costs and benefits
Especially difficult for
society
What is your opportunity
cost of getting a college
degree?
Everybodys is different.


Gordon Hayward
U.S. Mens Water Polo
Slumdog
Millionaire
Saving Private
Ryan
Extreme Couponing
Ferris Buehler
Marginal Principle
Individuals try to maximize
their well-being (their utility)
Should an extra unit of
something be purchased?
Should you watch another
television show? Should you
hike another mile?
Compare the benefits and
costs of that extra unit; the
incremental or marginal
benefits and costs.
If the marginal benefits (MB)
exceed the marginal costs
(MC) then undertake the
activity. Otherwise, dont.


Along Came Polly
Waiting in Line
You have waited 30 minutes
in a line for the Space
Mountain ride at
Disneyworld. You see a sign
that says, "From this point
on your wait is 45 minutes."
You must decide whether to
continue in line or to move
elsewhere.

On what basis do you make
the decision? Do the 30
minutes you've already
stood in line come into
play?

Economic Model of Crime
Decision Rule
If MB > MC steal another car
Assumptions
Resale value on car = $40,000
Income = $20,000 per year
Jail term = 5 years
Probability of Arrest = 20%
Probability of Conviction = 90%
Should you steal the car? Explain.
Policy Implications [How to deter crime?]
Increase jail sentence
Increase probability of arrest
Increase probability of conviction
Increase income

Practice Questions
In your city, each police officer has a
budgetary cost of $40,000 per year. The
property loss from each burglary is $4,000.
The first officer hired will reduce crime by 40
burglaries, and each additional officer will
reduce crime by half as much as the
previous one. How many officers should the
city hire?

Illustrate with a graph with a
marginal benefit curve and a
marginal cost curve.

Practice Questions
Which of the following will cause
property crime to increase?
a)An increase in jail terms.
b)A decrease in personal incomes.
c)An increase in the probability of arrest.
d)A decrease in the expected benefit.

Practice Questions
A heart surgeon is skillful at
unplugging arteries and rerouting
the flow of blood. These skills also
make her a very skillful plumber.
She can clear a drain in 6 minutes,
about 10 times faster than the most
skilled plumber in town.

a. Should the surgeon clear her own
clogged drains? Explain.
b. Suppose the surgeon earns $20
per minute in heart surgery, and the
best plumber in town charges $50
per hour. How much does the
surgeon gain by hiring the plumber
to clear the clogged drain?
Trade Creating Value
Individuals undertake actions (respond to
incentives) when the benefits of doing so
exceed the costs.
Trade is one type of action exchanging
one good (even money) for another.
Trade makes everybody involved better off.
People specialize at what they are good at
(something in which they have a comparative
advantage) and trade for something else.
Markets facilitate exchange / trade.
Gains from Trade


What Do Schoolteachers and
Sumo Wrestlers Have in
Common?
How Is the Ku Klux Klan Like
a Group of Real-Estate
Agents?
Why Do Drug Dealers Still Live
with Their Moms?
Where Have All the Criminals
Gone?
What Makes a Perfect Parent?
Would a Roshanda by Any
Other Name Smell as Sweet?


Increasing Residual Wage
Inequality: Composition
Effects, Noisy Data, or Rising
Demand for Skill?
Medium-Term Business Cycles
Can Information
Heterogeneity Explain the
Exchange Rate Determination
Puzzle?
Macroeconomic Effects of Tax
Changes
An Efficient Dynamic Auction
for Heterogeneous
Commodities
Asymmetric Contests with
Conditional Investments
Economics
isnt just
about the
boring
stuff