Saturday, August 9, 2008

Principle of Economics

Principle #1: People face Tradeoff.

All decisions involce tradeoffs. Example... time and income. One of the terms introduced was efficiency: getting the most out of scarce resources. And getting more of one good requires sacrificing some of the other. This is known as the opportunity cost.

Principle #2: The cost of something is what you give up to get it. By definition, the opportunity cost of an item is what must be given up to obtain it. It is the relevant cost for decision making.

Suppose u were planning to spend the day at the library, but your boss asks you to report for your part-time job. What is the true cost of going to work?

The opportunity cost of going to work is.....
- the money spent on transportation to work
- the time that could have been spent on relaxing urself after a long day at school and completing ur tutorials that hour earlier
- time you would take to understand key Optics concept

The opportunity cost of going to the library would then be........
- the forgone income that would pay for ur transportation fees to school, ur breakfast and lunch at school as well as ur textbooks and laptop.

So how then does one make a decision between the two as both are as important?

Principle #3: Rational People think at the Margin

A person is rational if one systematically and purposefully does the best one can to achieve one's objective. Many decision are not "all or nothing" but involve marginal changes -- incremental adjustments to an existing plan. Ie. starting ur day that couple of hours earlier and ending the day that couple of hours later. (However i realise that the opportunity cost of this is the level of attention u give during lectures!)

I had been thinking about the "all or nothing" idea. That my priority as a student is getting good grades. And as a son, not to burden my mum in terms of finance. And i can achieve these two objective by pushing aside tuition and being efficient: getting the most of scarce resources.

However, i want to think that im one of the rational ones and so will make marginal, not drastic changes, to my existing plan.

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