principles 1 -4 Flashcards
what do the first 4 principles deal with
how people make decisions
what are the 4 principles that deal with how people make decisions
- people face tradeoffs
- the cost of something is what you give up to get it
- rational people think at the margin
- people respond to incentives
when governement policies are designed what 2 goals often conflict
policy aimed at achieving more equal distribution of the pie
(welfare, EI)
- doing so will reduce efficiency (people in turn work less, producing less), pie gets smaller
what is principle one
people face tradeoffs
- have to give up one thing to get another
What is principle two
- cost of something is what you give up to get it
(time,wages, opportunity cost) whatever must be given up to obtain an item
what is principle 3
rational people think at the margin
- rational people systemically and purposely do their best to achieve their objectives, given the opportunities they have
what sort of things do rational people in firms decide
how many employees to hire
- ow much product to sell to maximize profit
what sort of things do rational people do
how much time to spend working, studying, family
what does marginal mean
edge
what are marginal chagnes
adjustments around the edges of what you are doing
- rational people often make decisons by comparing marginal benefits and marginal costs
a person’s willingness to pay for a good is based on what
marginal benefit that an extra unit of good will yield
what does marginal benefit depend on
how many units a person already has
- water is plentiful, diamonds are rate
when does a rational person take cation
if and only if the marginal benefit of the action exceeds the marginal act
what is principle 4
people respond to incentives
what is an incentive
prospect of a punishment or reward
rational people make decisions based on what
cost versus benefit (this is a response to incentives)
if the price of apples rise what happens
we eat more pears and less apples
- apple orchards hire more employees, harvest more apples because the benefit of selling apples is higher
(cost versus benefit)
how does cost versus benefit affect the government when making policies
- cost versus benefit affects people’s behavior
- taxes on gas,
- bus to work, live closer to work, really high taxes, maybe buy electric car
what happens when policy makers fail to consider affect of incetives
they often end up with results they did not intend
