Economic way of thinking

Economic way of thinking

Lessons

Five Key Ideas

1. Rational Choices
• A choice which use available resource to obtain maximum net benefit. People compare the benefit and cost in each choice and pick the choice that yields the largest net benefit.
2. Cost
• The opportunity cost of something is the best thing we must give up to get it.
3. Benefit
• The benefit of something is the gain or pleasure that it brings
4. Choices are Made at the Margin
• A margin is like an edge from which a choice is to be made. When a choice is changed by a little at a time, then eventually the choice is made at the margin
• Marginal Benefit (MB): what you gain from one unit of something
• Marginal Cost (MC): the opportunity cost of one-unit increase
• Choice is made when MB = MC, because this gives the maximum net benefit.
5. Respond to incentives
• Incentive is a reward or penalty that encourages or discourages an action. Making choices will leads us to respond to incentives
• Introduction
Economic Way of Thinking Overview:
a)
Rational Choices
• Comparing Benefit and Cost
• Net Benefit = Benefit - Cost

b)
Cost and Benefit
• Cost: the opportunity cost of something
• Benefit: the gain or pleasure that it brings

c)
Choices are Made at the Margin
• An edge from which a choice is made
• Marginal Benefit and Marginal Cost
• MB = MC

d)
Respond to Incentives
• Choices respond to incentives
• Incentives is a reward or penalty
• Encourages or Discourages action

• 1.
Understanding the 5 Key Ideas
Net benefit can be calculated by using the formula:
a)
Benefit - Cost

b)
Benefit + Cost

c)
Cost - Benefit

d)
Benefit

• 2.
The maximum benefit can be found when
a)
MB > MC

b)
MB < MC

c)
MB ≠ MC

d)
MB = MC

• 3.
Making rational choices will lead us to respond to _________________.
a)
Costs

b)
Benefits

c)
Margins

d)
Incentives

• 4.
When the Marginal Benefit is great than the Marginal Cost, then we want to:
a)
Increase the unit

b)
Decrease the unit

c)
Let the unit stay the same

d)
Examine the Net Benefit