Marginalism: Benefits and Costs

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ECON 1023 Fall 2011
Instructor: Gibson Nene
Chapter 1 Lecture Notes: Limits, Alternatives and Choices

The economic perspective or economic way of thinking takes the following concepts into consideration: * Scarcity and Choice
* Purposeful Behavior
* Marginalism: Benefits and Costs
Scarcity and Choice
Economics is about wants and means:
* Society has the resources to make goods and services that satisfy our many desires. * However, our economic wants far exceed the productive capacity of our limited resources – our resources are scarce. Scarcity

Definition: means that society has limited resources and therefore cannot produce all the goods and services people want In other words economic resources are scarce and wants are infinite. What is the meaning of scarcity from the consumers’ perspective? * Scarcity refers to limitations in consumption of the goods that are available because of limited income * Consumers have an income constraint.

Because resources are scarce when we choose to produce something we simultaneously make the choice to forgo producing something else. * When a good is produced, the resources employed can no longer be used to make another good. * We must decide what we will have and what we must forgo. Such sacrifices are referred to as opportunity costs.

Opportunity cost
Dfn: The value of the good, service or time forgone to obtain something else. When you choose to go to college, you forgo some potential income earnings. So Economics studies the choices made by individuals and societies to utilize scarce resources to satisfy unlimited wants. Purposeful behavior

We make decisions to achieve desired outcomes
* We are not always perfect in our choices
Human behavior is assumed to reflect rational self-interest
* Economics assumes that individuals seek to increase or maximize their utility: pleasure, happiness or satisfaction * As consumers we assume you are purposeful in deciding what goods and services to buy. * You want to get the best out of their choices

* Business firms are purposeful in deciding what products to produce and how. * Governmental entities are purposeful in deciding what services to provide and how to finance them. * In an nutshell, society seeks to get the best out of every choice. Does rational self-interest mean that individuals are selfish? It turns out that a lot of people help society through charitable donations, expertise without expecting you to pay for the service. Marginalism: Benefits and Costs

What is the meaning of Marginal in economics?
Marginal means extra, additional a change in. A change from the staus quo. e.g. should I study an extra hour for the exam? Should I buy an extra pair of shoes? Every decision involves marginal benefits (MB) and because of scarce resources, marginal costs (MC). Which choice would make you better off?

Individuals make rational decisions such that the marginal benefit exceeds (or equals) the marginal cost. Example shopping for a new car
* You find a standard model that you like but you are considering additional features (a sunroof, leather interior, heated seats and alloy wheels). As long as the marginal benefit (greater satisfaction) exceeds the marginal cost (extra expenses) of the additional features, you will add them. Economics relies on the Scientific Method

* Observing real-world behavior and outcomes.
* Formulating possible explanations of cause and effect (hypothesis). * Testing hypothesis by comparing predicted and actual outcomes. * Accepting, rejecting, or modifying hypothesis.
* Continuing the process.
Hypotheses → Theories → Laws and principles → Models
Economic principles are statements about economic behavior that enable prediction of the probable effects of certain actions. * They serve as tools for ascertaining cause and effect (or action and outcome) within the...
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