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Homo Economicus, Opportunity Cost, Thinking at the Margin

Homo Economicus, Opportunity Cost, Thinking at the Margin. Economic Man. 1) Rational: cost-benefit analysis 2) Quantifiable: assign numbers to anything How much do you love your mother? How much do you like hot dogs? 3) Statistics are useful 4) Predictable: if know costs + benefits

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Homo Economicus, Opportunity Cost, Thinking at the Margin

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  1. Homo Economicus, Opportunity Cost, Thinking at the Margin

  2. Economic Man • 1) Rational: cost-benefit analysis • 2) Quantifiable: assign numbers to anything • How much do you love your mother? • How much do you like hot dogs? • 3) Statistics are useful • 4) Predictable: if know costs + benefits • Individual (microeconomics) and groups (macroeconomics)

  3. Opportunity Cost • The next best choice you didn’t make • The thing you would have done if you hadn’t done this • Vs. Trade offs (all of the alternatives available) • Opp’y cost of college? • Tuition? Room and board? 4 years of wages and experience from working?

  4. Marginal Thinking • Margin: next unit • Marginal benefit: additional benefit of one more unit • Marginal cost: additional cost of one more unit

  5. How to think marginally • Produce/consume until MB = MC • What if MB < MC? • Spending too much for what getting, should consume less • Do you really want that 54th Big Mac? • What if MB > MC? • Could get more benefit, should consume more • Yes, I really do.

  6. Law of Diminishing Marginal Benefit/Utility/Return • At some point next unit doesn’t get you as much as the one before • (return to this w/supply and demand) • Eating one more hamburger, hiring one more dishwasher

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