Chapter 1: Thinking like an Economist

Should a basketball team's best player take all the team's shots? A professional basketball team has a new assistant coach. The assistant notices that one player scores on a higher percentage of his shots than other players. Based on this information, the assistant suggests to the head coach that the star player should take all the shots. That way, the assistant reasons, the team will score more points and win more games. On hearing this suggestion, the head coach fires his assistant for incompetence. What was wrong with the assistant's idea?

If the star player takes one more shot, some other player must take one less. The fact that the star player's average success rate is higher than the other players' does not mean that the probability of making his next shot (the marginal benefit of having him shoot once more) is higher than the probability of another player making his next shot. Indeed, if the best player took all his team's shots, the other team would focus its defensive effort entirely on him, in which case letting others shoot would definitely pay. (LO3)

Which is more valuable: saving $100 on a $2,000 plane ticket to Tokyo or saving $90 on a $200 plane ticket to Chicago?

Saving $100 is $10 more valuable than saving $90, even though the percentage saved is much greater in the case of the Chicago ticket. (LO3)

Refer to given information in Example 1.3, but this time your frequent-flyer coupon expires in a week, so your only chance to use it will be for the Fort Lauderdale trip. Should you use your coupon?

Since you now have no alternative use for your coupon, the opportunity cost of using it to pay for the Fort Lauderdale trip is zero. That means your economic surplus from the trip will be $1,350 2 $1,000 5 $350 . 0, so you should use your coupon and go to Fort Lauderdale. (LO3)

You would again save $10 by buying the game downtown rather than at the campus store, but your cost of making the trip is now $12, not $9. By how much would your economic surplus be smaller if you bought the game downtown rather than at the campus store?

The benefit of buying the game downtown is again $10 but the cost is now $12, so your economic surplus would be $2 smaller than if you'd bought it at the campus store. (LO2)

If the marginal benefit of each launch had been not $6 billion but $9 billion, how many shuttles should NASA have launched?

The marginal benefit of the fourth launch is $9 billion, which exceeds its marginal cost of $8 billion, so the fourth launch should be added. But the fifth launch should not, since its marginal cost ($12 billion) exceeds its marginal benefit ($9 billion). (LO3)

the scarcity principle

although we have boundless needs and wants, the resources available to us are limited. So having more of one good thing usually means having less of another

cost- benefit principle

an individual (or a firm or a society) should take an action if, and only if, the extra benefits from taking the action are at least as great as the extra costs.

sunk cost

cost that is beyond recovery at the moment a decision must be made

positive economic principle

one that predicts how people will behave

normative economic principle

one that says how people should behave

rational person

someone with well-defined goals who tries to fulfill those goals as best he or she can

economic surplus

the benefit of taking an action minus its cost

marginal benefit

the increase in total benefit that results from carrying out one additional unit of an activity

marginal cost

the increase in total cost that results from carrying out one additional unit of an activity

economics

the study of how people make choices under conditions of scarcity and of he results of those choices for society

microeconomics

the study of individual choice under scarcity and its implications for the behavior of prices and quantities in individual markets

macroeconomics

the study of the performance of national economies and the policies that governments use to try to improve that performance

average benefit

the total benefit of undertaking n units of an activity divided by n

average cost

the total cost of undertaking n units of an activity divided by n

opportunity cost

the value of what must be forgone to undertake an activity