Economic Insights: Rational Decision-Making and Market Dynamics

A Guide to Economic Reasoning - An example of the economic decision rule - Steve Levitt’s bestseller, “Freakonomics”, contains many examples of “thinking like An economist” - Levitt uses economic reasoning to explain why people become drug dealers - The potential financial benefit of selling drugs is much higher than the cost of Giving up a minimum wage job Marginal costs and marginal benefits - Using economic reasoning, decisions are often made by comparing marginal costs and Marginal benefits - Marginal cost is the additional cost over and above costs already incurred - Marginal benefit is the additional benefit above and beyond what has already accrued - If the marginal benefits of doing something exceed the marginal costs, do it Opportunity Cost - Opportunity cost is the benefit forgone of the next-best alternative to the activity you have Chosen - Opportunity cost should always be less than the benefit of what you have chosen - Opportunity cost is the basis of cost/benefit economic reasoning - Examples of opportunity cost - Individual decisions - Items you could have purchased with the money spent for tuition and books - Loss of the income from a full-time job

- Government decisions - The opportunity cost of money spent on the war on terrorism is less spending On health care or education Economic and Market Forces - Economic forces are mechanisms that ration scarce goods - A market force is an economic force that is given relatively free rein by society to work Through the market - The invisible hand is the price mechanism that guides our actions in a market. The invisible Hand is an example of a market force. - If there is a shortage, prices rise - If there is a surplus, prices fall - What happens in society can be seen as a reaction to, and interaction of - Economic forces - Social forces - Historical forces - Social, cultural, and political forces influence market forces - Political and social forces often work together against the invisible hand