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Chapter 1

Chapter 1 Why Study Economics

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University of Guelph
ECON 1100
Eveline Adomait

Chapter 1: Why Study Economics? Tuesday, January 8, 2013 12:56 PM 1.2 Scarcity, Rationality, and the Cost-Benefit Principle Definitions Scarcity Principle- the resources available to us, including time, are limited. Scarcity means that we have to make choices; having more of one good thing usually means having less of another The Cost Benefit Principle- a rational decision maker will take an economic action if, and only if, the extra benefits from taking the action are greater than the extra cost Opportunity Cost- the value of the next best alternative that best be forgone in order to undertake an activity Explicit Opportunity Cost- requires an outlay or payment Implicit Opportunity Cost- does not involve an actual payment 1.3 Three Important Decision Pitfalls Definitions Sunk Cost- a cost that is beyond recovery at the moment a decision is made Marginal Cost- the increase in total cost that results from carrying out one additional unit of activity Marginal Benefit- the increase in total benefit that results from carrying out one more unit of the activity Pitfall One: Ignoring OpportunityCost - Many of us tend to overlook the implicit values of activities that fail to happen - People make mistakes because they don't consider the alternatives Pitfall Two: Failure to Ignore Sunk Costs - The opposite of the first pitfall, people are influenced by costs that are not actually opportunity costs - The idea of sunk costs, money s
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