Economics, Unit 2: Rational Decision-Making and Cost-Benefit Analysis

Rational Decision-Making

A process of comparing costs and benefits of various options to determine which are rational and which are rational

Fixed Costs

Costs that you only pay once, or that you multiple times, but each time you pay the same amount.

Variable Costs

Costs that you pay multiple times, but each time you pay a different amount

Rational Decisions

Decisions whose total benefit is greater than or equal to their total cost

Irrational Decisions

Decisions whose total cost is greater than their total benefit

Implicit Costs

Negative feelings that you experience or non-physical things that you give up as result of a decision (giving up a relationship, losing time, feeling sad, etc...)

Rational Decision-Making Cheat Sheet

Rational --> Total Benefit > Total Cost or Total Benefit = Total Cost Irrational --> Total Cost > Total Benefit

Utility

Something intangible that you gain as a result of a decision (personal satisfaction, happiness, love, pride, etc...)

Explicit Costs

Something physical you give up as a result of a decision (money, other valuables)

Monetary Benefits

Something tangible that you gain as a result of a decision (money, a car, a kiss)

Cost-Benefit Analysis

The process of calculating your total cost and total benefit so that you can compare them to determine if you are making a rational decision

Total Benefit

The sum of all benefits, both Monetary Benefits and Utility. Benefits are things you gain as a result of a decision

Total Cost

The sum of all of the costs, including fixed, variable, explicit and implicit costs. Costs are things you give up as a result of a decision.