Question

1. Economists think in terms of key concepts.

List the concepts that economists think in terms of. Define opportunity cost. Use the concept of opportunity cost to explain why some things are not done. Explain why economists consider costs and benefits, instead of only benefits. Give an example from your life where you have considered both costs and benefits. Explain why it is important to consider unintended effects.

Answer 1

Economists think in the terms of

-supply

-demand

-cost

-benefits

-incentives

-scarcity

These gains and cost are of several types. Economic decisions has to be 'rational' and taken in by weighing both the gains as well as the cost of a project over a period of time.

Opportunity cost refers to

Oppurtunity cost refers to the cost of the next best alternative foregone. That is ,the cost of the second best opportunity.

Some things are not done because their opportunity cost is higher than the oppurtunity cost of our best decision. Meaning if we decide to persue our second best option we will have to forgo our best option, the cost of which will be higher .

For example, if we are pursuing a college degree, we are forgoing the opportunity of earning (at the time of studying), the potential salary that could be earned is the opportunity cost of studying.

But we choose not to earn now because we believe studying will lead to higher salary and by choosing not to earn now, we are minimising our potential costs.

Cost and benefits both have to be taken into account because if let's say both options pay us the same, how would we decide which is better? For that we have to look at the costs. The option which has a lower cost which be chosen.

Because, profits = benefits-costs.

For ex: while choosing a college degree, I accounted not only the higher salary I'll get after I graduate as my benefits, but I also took in the cost of my forgone earnings right now.

The unintented effects of cost-benefits analysis is that sometimes it's difficult to compute opportunity costs because they are nowhere clearly stated. Same also goes for benefits sometimes, since we take decisions before those benefits can be reaped.