Choice and Opportunity Cost

Choices and Trade-Offs In any situation you will find that there is a choice to be made. Some decisions are easy, some are very difficult. Economics makes a study of these choices; what people get or do, versus what they do not get or do. These are Trade-Offs. Example – After school you could do your homework, or go out with your friends. What is the trade-off in each case? What other things could you do with this time?

Opportunity Cost Opportunity costs are trade offs that you accept. The opportunity cost is the best thing or activity you are willing to give up, to get something else you want. This opportunity cost can be expressed as a good, service, your time, expense, or even a relationship.

Margins Incremental cost vs. benefit – For most economists, thinking at the margin is essential to economic thinking. The idea of “thinking at the margin” is all about what it will cost to produce just one more item. If there is benefit, you do it, then consider the next item.

The Rational Actor in Economic Theory (1) Homo economicus is a term used for an approximation or model of Homo sapiens that acts to obtain the highest possible well-being for himself given available information about opportunities and other constraints, both natural and institutional, on his ability to achieve his predetermined goals. This approach has been formalized in certain social science models, particularly in economics.

The Rational Actor in Economic Theory (2) Homo economicus is seen as "rational" in the sense that well-being as defined by the utility function is optimized given perceived opportunities. That is, the individual seeks to attain very specific and predetermined goals to the greatest extent with the least possible cost.

The Rational Actor in Economic Theory (3) Note that this kind of "rationality" does not say that the individual's actual goals are "rational" in some larger ethical, social, or human sense, only that he tries to attain them at minimal cost. Only naïve applications of the Homo economicus model assume that this hypothetical individual knows what is best for his long-term physical and mental health and can be relied upon to always make the right decision for himself.