1.1 How People Make Decisions
1.1 a. Principle 1: Trade-offs
A technique of reducing or forgoing one or more desirable outcomes in exchange for increasing or obtaining other desirable outcomes in order to maximize the total return or effectiveness under given circumstances. [1]
Example: In the guns or butter model, the more a nation has to spend on defense, the less it can spend on civilian goods and vice versa. [2]
Trade-offs [3]
1.1 b. Principle 2: Opportunity Costs
Opportunity cost: A benefit, profit, or value of something that must be given up to acquire or achieve something else. [4]
Example: A high school student gives up work in order to go to college. The opportunity costs is the wages he gives up and also the costs of attendance.
Opportunity Costs[5]
1.1 c. Principle 3: Marginal Cost
The increase or decrease in the total cost of a production run for making one additional unit of an item. [6]
Example: The total cost of producing one pen is $5 and the total cost of producing two pens is $9, then the marginal cost of expanding output by one unit is $4 only. [7]
Marginal Costs [8]
1.1 d. Principle 4: Incentives
Inducement or supplemental reward that serves as a motivational device for a desired action or behavior. [9]
Example: If the price of gas rises, people switch to smaller, fuel efficient cars.
Incentives [10]
