Economics Summary Lecture 1

Scarcity

• Intra-personal competition:

• How to make best use of time, money, etc.

• Trade-offs

• Inter-personal competition:

• Who gets a scarce resource?

• Allocation Problem:

• How can resources be allocated efficiently?

• Distribution Problem:

• How can resources be allocated fairly?

The Pareto Criterion:

• Allocation

• Assignment of (specific parts of) a resource to specific individuals

• allocation A

• Reallocation

• Re-assignment of (specific parts of) a resource to specific individuals

• allocation B

Pareto Improvement: Compared to allocation A, allocation B improves the utility of some individuals
without hurting the utility of others.

Pareto Efficient: An allocation where no Pareto Improvement is possible.

Solving Allocation Problems

• Intra-personal:

• Transformation / Production

• Inter-personal

• Brute force

• First come first served

• Lottery
 • Voting

• Top-down assignment

• Market price

Marginal product

• Change in output per unit change in input

• evaluated at a given point

• holding other inputs constant

Average product

• Average output per unit of inpu

Choices depend on constraints and involve tradeoffs

• Day = 24h

• Study vs. Party vs. Sleep

Revealed preferences

• You choose to party instead of sleeping or studying

• Party has a higher utility to you than sleeping or studying

• You prefer party to sleeping and studying

Opportunity cost: Net benefit of the best foregone alternative

• monetary and non-monetary

• benefits – cost

Feasible frontier: Maximum attainable output for given amount of input

Marginal rate of transformation (MRT):

• Slope of the feasible frontier

• What you have to give up (good 1) to get another unit (good 2)