Summary EKN224 Unit 2

Technology and Incentives

, Lecture 1




Economic Decisions



To understand the economy ,
we have to understand how
people make decisions ,

and what factors they take into account




&. Model of decision
making
-reservation option : the next best alternative

-Opportunity cost : value of the next best action not taken


- economic cost : direct cost from
taking action +
opportunity cost

benefit from
-economic rent : net option taken
opportunity cost




Example :
Deciding whether or not to
go
to concert



If to concert OR instead of concert could babysit
you go you

·
The tickets cost 25 You would earn $40
·
Your enjoyment value is $55 ·
It would be hard work and would cost s IS




·
Step D : work out net benefit of both options (benefit-cost)

·
net benefit = 55-23 : 30 ·
net benefit = 40-18 = $22
This is

Step Q : choose the one with the
highest net benefit decision rule
our

:
going to the concert would be the better option


* Reservation is
option =
babysitting
* Opportunity cost = $22 - be
forgoing the concert option means
forfeiting
the net benefit of babysitting
* Economic cost = 25 + 22 = 3
,
47


* Economic rent = 30-22 =
38
La
Another decision rule if action would
: A
give
!
econ rent
,
Do it If you are already doing action A

it !
and the econ rent is positive/zero, carry on
doing