Principle #1: People Face Tradeoffs
To get something you want, you have to give up something else you want. Scarce resources. Think of allocating your time or money.
Societies face a tradeoff between more consumer goods (low taxes) and more public goods (defense, social programs).
Since governments can borrow, there is a tradeoff between consumption for current and future generations.
There is sometimes a tradeoff between the environment and jobs. equity: fair treatment efficiency: producing the biggest possible "pie". tradeoff between the two: will you sacrifice to become a doctor if your wealth is taxed?
Principle #2: The cost of something is what you give up to get it. example: College education.
The benefits are the job opportunities and personal satisfaction, but there are costs besides
“out of pocket” costs like tuition and books.
Make sure you count the 4 years' lost earnings.
(Lebron James made a good choice.)
Just count the room and board costs over and above what you would have paid if you didn't go to college. opportunity cost--what you give up in order to obtain the item in question.
Principle #3: Rational people think at the margin. A marginal change is a small adjustment to an existing plan of action. [a deriv*****] example: Suppose you are an airline executive deciding whether to sell a standby ticket for
$300. The 200 seat plane is nearly, but not quite, sold out, and the total costs for the flight are $100,000, or an average cost of $500.
Should you sell a standby seat "below cost"?
Yes, since the marginal benefit, $300, exceeds the marginal cost (cost of peanuts, soda, extra fuel costs, discomfort due to congestion--at most $20).
A rational decision maker (who can finely adjust his/her action) chooses the level of action where the marginal benefit equals the marginal cost. Principle #4: People respond