Core Principles of Microeconomics - Lecture 2

Introduction to Microeconomics

• Definition: Microeconomics focuses on individual households and markets (smaller level), whereas macroeconomics examines the entire economy (big picture).
• Example Questions:
  • Impact of a federal income tax cut on employment and wages - Macroeconomics.
  • Increasing gasoline tax leading to more bicycling to work - Microeconomics.

Four Core Principles of Good Decision Making

• Cost-Benefit Principle (covered in the last class)

Opportunity Cost Principle (Focus of This Class)

• Key Concept: The true cost of something is what you give up to get it.
  • Example: Choosing between living with parents (free) vs. an apartment ($650/month).
  • Consider non-financial costs like privacy, commute, and chores.
  • Opportunity Cost Definition: Best option not chosen, e.g., living with parents vs. renting an apartment.
• Mark Zuckerberg Example: Avoids decision fatigue by wearing the same clothes to save limited attention.

Opportunity Cost in Education

• Scenario: Narita considering MBA vs. continuing to work.
  • Opportunity cost calculation includes tuition and foregone income.
  • For Narita: $60,000 tuition + $70,000 income = $130,000 opportunity cost.
• Comparison with Other Colleges: Opportunity costs help determine why a student chooses one college over others.

Opportunity Cost in Business Decisions

• Example: LeBron James deciding between being a baker or continuing his basketball career.
  • Would give up $39 million basketball salary for $1 million bakery earnings.
  • Entrepreneurial Decision: Consider current job salary vs. starting a new business.

Investments

• Decision Making: Investing in a new business vs. other investment opportunities.
  • Consider foregone investment opportunities as an opportunity cost.

Sunk Costs

• Definition: Costs already incurred that cannot be reversed.
• Example: Paying $10 for a bad movie.
  • Decision: Continue watching or leave and do something enjoyable.
• Principle: Ignore sunk costs as they are not opportunity costs.

Conclusion

• The lecture focused on understanding opportunity costs and how they play a crucial role in decision-making processes.
• Next class will continue exploring the four core principles of decision making.