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CHAPTER

1. CHAPTER. Economics: Foundations and Models. Bill Gates, chairman of Microsoft, testified before Congress in 2008 that limiting the number of foreign technical workers allowed into the United States was resulting in a “critical shortage of scientific talent.”. Prepared by:. Fernando Quijano.

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  1. 1 CHAPTER Economics:Foundationsand Models Bill Gates, chairman of Microsoft, testified before Congress in 2008 that limiting the number of foreign technical workers allowed into the United States was resulting in a “critical shortage of scientific talent.” Prepared by: Fernando Quijano

  2. 1 CHAPTER Read these Sections Chapter 1: Economics:Foundationsand Models

  3. WHAT is Economics? 4.1 Economics: The study of the choices people make to attain their goals, given their scarce resources. • Economics is a way of understanding human behavior • Economics is a social science • Economics is the study of choices and decisions

  4. Examples of Microeconomic Decisions • (Individual) How many hours should I study tonight and how many should I sleep? • (Individual) Should I start working after I finish college or should I get my MBA? • (Household) How many children should I have? Should they go to a public or private school? • (Entrepreneur) How long should I keep my hot dog cart open on Tuesday night? Should I hire an employee or do it myself? • (Firm) Should the company sell computers and printers or just computers? Should the company develop a tablet computer to compete with the iPad? All of these decisions involve trade-offs between different options.

  5. Trade-offs and Scarcity Trade-off The idea that because of scarcity, producing more of one good or service means producing less of another good or service. An individual can also face a trade-off between two choices. But why? Scarcity A situation in which unlimited wants exceed the limited resources available to fulfill those wants. • Scarce resources include time, money, and natural resources. • Scarcity essentially occurs with everything, everywhere, at all time.

  6. Trade-offs and Scarcity • No matter who you are, you have to give up certain choices for other choices. • Individuals/families/firms/governments always have to choose between things that they may want to do • If each of us had an endless supply of time and resources, we could do anything and everything we wanted • But we don’t. • Since we don’t, we consider the what we give up to be the opportunity cost of our choice Opportunity cost: the highest-value alternative that must be given up to engage in an activity What would you rather be doing than reading this?

  7. 1.1 LEARNING OBJECTIVE Explain these three key economic ideas: People are rational. People respond to incentives. Optimal decisions are made at the margin. Three Key Economic Ideas Throughout this book, as we study how people make choices and interact in markets, we will return to three important ideas: 1.People are rational. 2.People respond to economic incentives. 3.Optimal decisions are made at the margin. Marginal analysis Analysis that involves comparing marginal benefits and marginal costs.

  8. 1.3 LEARNING OBJECTIVE Understand the role of models in economic analysis. 1. People are Rational • People don’t always make the “best” decisions but they do make decisions that they believe will benefit them • We must assume that decisions are made such that the benefit outweighs the cost • People may not make the best choices but they do make rational choices • No one would rationally decide to do something in which the cost will outweigh the benefit: • Would you take a job that paid $20 if it cost $20 in gas to get there and back? Essentially, when you make a choice, we assume that you believe you are using your resources as best as you can.

  9. 2. People Respond to Economic Incentives • Incentive: anything that motivates or encourages a particular choice • Economic incentives motivate people to do what they may not do otherwise.

  10. 1.3 LEARNING OBJECTIVE Understand the role of models in economic analysis. 3. Optimal Decisions are Made at the Margin • Marginal means “additional” or “extra” in the context of economics • Marginal benefit: extra benefit you receive from an additional unit of something • Marginal cost: extra cost you receive from an additional unit or something • Optimal economic decisions are made such that the marginal benefit equals the marginal cost

  11. 1.4 LEARNING OBJECTIVE Distinguish between microeconomics and macroeconomics. Microeconomics andMacroeconomics Microeconomics The study of how households and firms make choices, how they interact in markets, and how the government attempts to influence their choices. Macroeconomics The study of the economy as a whole, including topics such as inflation, unemployment, and economic growth.

  12. KEY TERMS Economic model Economic variable Economics Macroeconomics Marginal analysis Microeconomics Opportunity cost Scarcity Trade-off

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