This chapter’s learning goals are:
- Explaining the concepts of scarcity and choice, the cost-benefit principle, and the importance of incentives.
- Evaluating and identifying costs and benefits.
- Understanding the concept of economic rationality.
- Understanding why what happens “in the margins” is important.
- Distinguishing between positive and normative statements in economics.
How does an economist reason? We look at this by focusing on the following statement: smaller classes are better for the child’s education.
An economist will first wonder whether there is any evidence for the hypothesis before accepting it. What would indicate that making classes smaller would result in better education for a child?
Second, an economist will look for motives, because people will often act on their self-interest (incentives matter). A teacher, for example, benefits from smaller classes, because that would result in less work. Perhaps that is the reason why this person would argue for smaller classes. There are exceptions, here, of course—individual altruism does exist (for instance, environmentalists).
Third, the economist will make a cost-benefit analysis: do the potential advantages (benefits) of creating smaller classes outweigh the potential disadvantages (costs) (cost-benefit analysis)?
Finally, the economist will likely emphasize that there is a point where reducing class size will no longer lead to a positive result.
How do we study choice under conditions of scarcity?
Economics is the study of how people make choices under conditions of scarcity, and how these choices affect society.
The scarcity principle (also known as the no-free-lunch-principle) means that, despite people having infinite wants, resources available to us are limited, which means that having more of one thing often means having less of another thing. That is where
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