 In this video, we are going to talk about Chapter 1 of your textbook, Microeconomics and Behavior by Frank. So, it will be really helpful to read a textbook. Don't forget to read Chapter 1 before or after this video. In Chapter 1, the following concepts and topics will be discussed. What microeconomics is and fundamentals of cost-benefit decision-making, opportunity cost and sunk cost and positive versus normative economic analysis and marginal analysis. What is economics? Typical first-year student walks into the classroom and economics is a study of thinking. Economics is a study of money or economics is accounting or something like that. Or economics is just a harder. So, don't take the class. None of these are true. Economics is the study of use of scarce resources that have alternative uses. That's the classic definition of economics. Later on, I'll add some more stuff to it because it's not a perfect definition. Anyway, there are people and people need resources to fulfill their desires. These resources cannot be infinite, but desires can be. So, people need to make choices about how to use their scarce resources, scarce resources or limited means. By the way, are not just restricted to monetary terms. Scarce resources also include non-monetary terms. For example, if your friend is a pain for the all-you-can-eat buffet, your desire is to eat as much as possible. But your scarce means is your stomach, the size of your stomach, right? Scarce means is not always a monetary term as said in this example. Economics studies these choices, people's choice. So, how do people choose? It means that people are able to calculate choices by comparing costs and benefits. If the benefits outweigh the cost, do it. Otherwise, don't do it. Everything in a microeconomics boils down to the simple cost-benefit comparison. Not everything, but, well, let's pretend. Assume that you know exactly what you want and that you can put a price on all of your desires. If you don't make this assumption, you'll have a very, very hard time thinking like an economist. Just pretend that you're a robot. We call those people who can decide based on a cost-benefit comparison rational. But you realize in real life, people are not rational. People are irrational. People oftentimes make a decision when cost is bigger than benefits. It is not straightforward or rather complicated. The rational individual, the necessary assumption in neoclassical economics is therefore absurd. Okay, what do we do? Unfortunately, this is how our textbook is written and most textbooks are written. But I want you to understand the criticism of rational individual assumption. I want to add what Frank says. Frank, our book author. Here's how I think as an economist. We want people to do certain things, like I want my students to study hard and learn a lot. Employers want their employees to work hard. But we also want to reinforce certain values, like we want students and employees to be honest, trustworthy, and caring people. Economic systems organize activities by creating incentives, rewards that will include the effort we'd like to see. There are two basic types of rewards. Extrinsic and intrinsic. For example, for students, there are grades which are extrinsic motivation and satisfaction or intellectual fun as an intrinsic motivation. Similarly, in the job market, employers offer money, which are extrinsic motivation and job satisfaction, which are intrinsic motivation. Note that the extrinsic rewards, motivation, and effects are much easier to measure than intrinsic rewards. So how do we design incentive structures that encourage people to work hard and be productive and also be satisfied? This is something I want you to think of. It's a hard, yes, understand. Let's put the criticism of rational individual assumption aside. Let's go back to the textbook. Here we are. Let's try to compare costs and benefits. First, we need to identify the costs and benefits and add them up to compare. Let's see the example. Here's the situation you're moving to Arizona from Massachusetts to go to graduate school. Let's assume that you've lived in Massachusetts for entire life. Assuming that, list all the pros and cons. Once you list the pros and cons, let's see the examples. Once you list the pros and cons, let's see the examples. To add them up and compare the costs and benefits, we need to understand the concepts of opportunity costs and some costs first. First, opportunity cost is the value of the next best available alternative that must be forgotten to undertake the activity. Let's look at the example. If you aren't watching this video now, what would you be doing? That is, what's your next best alternative? You might be working at your job. If then, what do you earn per hour? How much do you earn per hour? That's your opportunity cost, or you could choose to take a nap. What's the dollar value you would place on taking a nap? That's the opportunity cost of watching this video. But here you are in this class, online class. That means by definition that you placed a higher value on watching video than on your next best alternatives. The other cost is a sum cost. A sum cost is the cost that has already been incurred and cannot be recovered. Let's go back to watching this video example. You already have a computer to watch this video, I assume. The cost of the computer cannot be regarded as a sum cost. So the cost of computer is a sum cost. Unlike opportunity cost, sum cost should be ignored because it is irrelevant for all decisions about the future. Let's look at the example of opportunity cost and sum cost. Suppose you are thinking of trading in your old car for a new one. Opportunity cost of trading in is the value of all that must be sacrificed to do the activity.