The Economic Approach Chapter 1 Week 1

Macro vs. Micro Macro Economy as a whole. growth of total output, inflation, employment. Micro Markets considered separately. Representative topics: specific labor markets (e.g. market for nurses), oil prices, monopolies.

Current Statistics U.S. GDP 13,755,900,000,000 Unemployment 4.6% Inflation 2.4% Growth 3.2%

Rationality Assumption People have well-defined goals and try to fulfil them the best they can.

Scarcity Principle No free lunch. Boundless needs and wants.

Concept of Cost Dollar costs (seen) Opportunity costs (unseen) Sunk costs (out of sight—forget about them!)

Cost Benefit Principle An action is taken if marginal benefit exceeds marginal cost.

Eight Principles 1.Scarcity implies that trade-offs must be made. 2.People engage in economizing behavior: their actions are guided by a cost-benefit calculation. 3.People respond to incentives. 4.Individuals make decisions at the margin. 5.Information is costly. 6.Secondary effects are important: “unintended consequences” 7.The value of a good is subjective. 8.The test of a theory is its ability to predict.