Scarcity witch necessitates that choices must be made. Making choices implies the existence of “opportunity costs”. The cost benefit principle: An individual (or a firm or a society) is better off taking an action if, and only if, the extra (marginal) benefit from taking the action is greater than the extra (marginal) cost. A rational person employs cost-benefit analysis in decision-making, which is also known as decision-making at the margin. Economic surplus: In general, maximizes make decisions in order to maximize economic surplus (the benefit of taking an action minus its cost). Opportunity cost of an action is = Direct cost Plus the best alternative forgone Less any savings derived from the activity.
According to the author, what Four Pitfalls do most non-economists mismanage as they attempt to make important lifetime decisions?
The four pitfalls according to the author are:
1. Measuring the Costs and Benefits as Proportions Rather than Absolute Dollar Amounts. 2. Ignoring Opportunity Costs
3. Failure to Ignore Sunk Costs
4. Failure to Understand the Average-Marginal Distinction Margins and averages are extremely important in studying and using microeconomics.