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Explorations in Economics. Alan B. Krueger & David A. Anderson. Chapter 3: Making Economic Decisions Module 7: Understanding Costs and Benefits Module 8: Rational Decision Making Module 9: Behavioral Economics: Decision Making in Practice. MODULE 7: Understanding Costs and Benefits.
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Explorations in Economics Alan B. Krueger & David A. Anderson
Chapter 3: Making Economic Decisions • Module 7: Understanding Costs and Benefits • Module 8: Rational Decision Making • Module 9: Behavioral Economics: Decision Making in Practice
MODULE 7:Understanding Costs and Benefits KEY IDEA: To make a good decision you need to weigh all the costs against all the benefits. OBJECTIVES: To identify the opportunity costs of decisions you make. To describe the tradeoffs necessitated by budget constraints. To explain why sunk costs should not affect decisions.
THE TRUE COST OF DECISIONS: OPPORTUNITY COST Opportunity Cost and Tradeoffs Budgets and the Budget Line
SUNK COSTS Sunk costs are costs that have been paid and cannot be recovered.
Module 7 Review What is… A. Budget? B. Budget line? C. Sunk cost? D. Opportunity cost?
MODULE 8:Rational Decision Making KEY IDEA: To make rational decisions, people must compare the costs and benefits of each option and choose the one that best serves their interests. OBJECTIVES: To explain the requirements of rational decision making. To identify key types of decisions. To apply the concept of marginal analysis to real- world situations.
COMPARING BENEFITS & COSTS TO MAKE RATIONAL DECISIONS A rational decision benefits the decision maker as much as possible. A self- interested individual makes decisions for his or her own benefit. Wearing a seat belt is an example of a rational decision.
RATIONAL DECISION MAKING The net benefit of a choice is the benefit of the choice (measured in dollars) minus the cost of the choice.
MARGINAL ANALYSIS: DECIDING HOW MUCH? Marginal benefitis the additional benefit of doing something one more time. Marginal cost is the additional cost of doing something one more time.
Module 8 Review What is… A. Rational decision? B. Self- interested? C. Net benefit? D. Marginal benefit? E. Marginal cost?
MODULE 9:Behavioral Economics: Decision Making in Practice KEY IDEA: Recognizing six common decision- making mistakes can help you make better choices. OBJECTIVES: • To explain why decision making is often less than fully rational. • To identify common decision- making mistakes. • To present guidelines for avoiding irrational behavior.
WHAT IS BEHAVIORALECONOMICS? Behavioral economics is the branch of economics that uses ideas about decision making from psychology to explain economic behavior. Are holiday “door busters” really a great deal or a way to lure customers to a particular store? Holiday sales are analyzed by economists yearly.
MISTAKES MADE WHILE MAKING DECISIONS 1. Allowing the presentation or framing of options to affect decisions 2. Letting sunk costs matter 3. Being too impatient 4. Making errors due to overconfidence 5. Avoiding change even when things could be better 6. Devoting time and energy to punish people who treat them unfairly even when it is not in the punisher’s self- interest.
Module 9 Review What is… A. Behavioral economics? B. Framing? C. Status quo bias? D. Sunk cost bias? E. Impatience? F. Overconfidence? G. Worry over fairness?
