Sarah Riad El Hindi
ID: 64789
Chapter 1 – Thinking Like an Economist
Economics in simple terms is the study of scarcity. Scarcity of resources heavily influence the decisions made for society, and how they impact the society as a whole.
In the real world, it’s not possible to always have the best of both worlds; therefore one must have to make a trade-off between two desired things. The same thing is implied in economics, and it is what we call The Scarcity Principle.
The Scarcity Principle: society has a limited amount of resources at its disposal; therefore it cannot satisfy all people’s unlimited wants and needs.
This insinuates that people must give up something to obtain one of the things they desire. However, what must they take into consideration in order to
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In order to make a decision, the opportunity cost must be considered.
Opportunity cost: the benefits you could have received by taking an alternative action.
It is inclusive of the implicit and explicit costs.
Economic models are based on assumptions. One must identify what is a crucial feature and what is an unrelated feature. Example of an economic model is the cost-benefit principle.
Rational people sometimes fall into problems when applying the cost-benefit principle.
Those mistakes include:
1. Measuring costs and benefits as proportions instead of absolute amounts. The economic surplus in this case is neglected and that gives a wrong indication on whether the action is favorable or not.
2. Paying no attention to implicit costs. Implicit costs together with explicit costs help you identify your opportunity cost. Alternatives should be studied and your decision should be based on the cost-benefit principle.
3. Failure to think at the margin. Any cost that was spent prior to when the decision was made has to be ignored. A sunk cost will not impact the decision