1. Homo Economicus, Opportunity Cost, Thinking at the Margin

2. Economic Man 1) Rational: cost-benefit analysis
2) Quantifiable: assign numbers to anything
How much do you love your mother?
How much do you like hot dogs?
3) Statistics are useful
4) Predictable: if know costs + benefits
Individual (microeconomics) and groups (macroeconomics)

3. Incentives Matter
Pop Quiz: How Do You Stop Sea Captains From Killing Their Passengers?

4. Opportunity Cost The next best choice you didn’t make
The thing you would have done if you hadn’t done this
Vs. Trade offs (all of the alternatives available)
Opp’y cost of college?
Tuition? Room and board? 4 years of wages and experience from working?

5. Fundamental Problem
Scarcity: Unlimited needs and wants, limited resources
 Choice
Efficiency: minimizing costs = most out for least in
Can’t make anyone better off w/o making someone worse off
Determined with marginal analysis (next)
Efficient = “good”
Danger: accept this, and lots of unintended consequences accrue
E.g. efficient not “fair” efficient if I have all the money: can’t make you better off w/o making me worse off

6. Marginal Thinking Margin: next unit
Marginal benefit: additional benefit of one more unit
Marginal cost: additional cost of one more unit

7. How to think marginally
Produce/consume until MB = MC
What if MB < MC?
Spending too much for what getting, should consume less
Do you really want that 54th Big Mac?
What if MB > MC?
Could get more benefit, should consume more
Yes, I really do.

8. The Three Economic Questions
What goods and services should be produced?
Guns vs. butter/capital vs. consumer
How should these goods and services be produced?
How combine factor resources (land, labor, capital, entrepreneurial ability)
Who consumes these goods and services?
US: Distribution of income: factor payments [wages, rent, interest, profit (for entrepreneurs)]

9. Production Possibilities Curve/Frontier -
Capital goods
Consumer goods
Law of increasing costs

10. Shifts in the Curve Change in the quantity or quality of resources
Achieved primarily through capital (physical or human) investment: school
Adam Smith (The Wealth of Nations, 1776): capitalism a capital accumulating machine

11. Open Mixed Circular Flow Model
The Rest
Of the
World
Product
Market
Households
Firms
Government
Factor
Market

16. Ed Glaeser
Triumph of the City: How Our Greatest Invention Makes Us Richer, Smarter, Greener, Healthier, and Happier

18. NYC vs. Danville