1.2- The Economic Way of Thinking PDF

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1.2- The Economic Way of Thinking Define Economics and the Features of the Economic way of Thinking.  

Whenever our wants are greater than the resources to meet those desires, we have an economic problem. It is this reality that gives economists their unique perspective.

Economic Perspective: A viewpoint that envisions individuals and institutions making rational decisions by comparing the marginal benefits and marginal costs associated with their actions 

The Economic Way of Thinking has several crucial and closely interrelated features

Scarcity and Choice 

The economic resources needed to make goods and services are in limited supply

Scarcity: humans have unlimited wants and needs with limited resources to satisfy them with  

At the core of economics is the idea that “there is no free lunch.” You may get treated to lunch, making it free to you, but there is a cost to someone—ultimately society. Scarce inputs of land, equipment, farm, labour, the labour of cooks and waiters, and managerial talent are required.

Opportunity Costs: The number of other products that must be forgone or sacrificed to produce a unit of product. Purposeful Behaviour 

Economics assumes that human behaviour reflects rational self-interest

Utility: The comparison of marginal (extra or additional) benefits and marginal costs, usually for decision making     

Utility is the pleasure, happiness, or satisfaction obtained from consuming a good or service Because consumers weigh costs and benefits, their decisions are purposeful or rational, not random or chaotic. Consumers are purposeful in deciding what goods and services to buy. Business firms are purposeful in deciding what products to produce and how to produce them. Government entities are purposeful in deciding what public services to provide and how to finance them.

Marginal Analysis: Comparing Benefits and Costs Marginal Analysis: The comparison of marginal (extra or additional) benefits and marginal costs, usually for decision making

Marginal Benefits: the additional satisfaction or utility that a person receives from consuming an additional unit of a good or service. A person's marginal benefit is the maximum amount he is willing to pay to consume that additional unit of a good or service.            

To economist’s marginal means extra, additional, or a change in. Each option will have marginal benefits and marginal costs. In making choices, the decision maker will compare those two amounts. For example, you and your fiancée are shopping for an engagement ring. Should you buy a ¼-carat diamond, a ½-carat diamond, a ¾-carat diamond, or a larger one? The marginal cost of the larger diamond is the added expense beyond the smaller diamond. The marginal benefit is the greater lifetime pleasure (utility) from the larger stone. If the marginal benefit of the larger diamond exceeds its marginal cost, you buy the larger stone. But if the marginal cost is more than the marginal benefit, buy the smaller diamond instead, even if you can afford the larger stone. In a world of scarcity, the marginal benefit associated with some specific option always includes the marginal cost of doing without something else. Spending money on the larger diamond may mean forgoing a honeymoon to an exotic location. Opportunity costs, the value of the next best thing forgone, are always present whenever a choice is made....