CHAPTER 5 - Chapter 5 Costs & Decision Making What is the...

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Chapter 5 Costs & Decision Making
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What is the basic assumption economists make with regard to decision-making? It‘s all about. ..
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ME!
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The Pursuit of Self-Interest People only take into account the consequences of their actions on their own well-being Oversimplification, but: self-interest often regarded as most common motive of actions
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Decision-Making: The Recall: Take an action if its benefits outweigh its costs People pursuing their own interests consider only the cost/benefit to themselves Decisions are made on the basis of expected costs & benefits
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Marginal Analysis „marginal“ = extra, additional When making a decision look at the marginal benefit/cost Examples: Even if you like literature more than accounting, you may study more for accounting before exam week. benefit of an additional hour of studying accounting higher than benefit of an additional hour devoted on literature. You get up in the morning to go to history class although you‘d rather sleep another hour does that mean you value history lessons more than sleep?; or does it mean you value an additional hour of history class more than an additional hour of sleep?
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The Estimation of Costs Two Important Rules
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Estimating Costs of an Action Take into account the implicit costs Recall: the „opportunity cost“, not the money cost ist important Distinguish: Explicit costs : involve a monetary payment Implicit costs : non-monetary costs associated with using your own resources Example: Attending college
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Estimating Costs of an Action Ignore fixed and sunk costs Distinguish:
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This note was uploaded on 04/29/2008 for the course ECON 101 taught by Professor Fels during the Spring '08 term at Wisconsin Milwaukee.

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CHAPTER 5 - Chapter 5 Costs & Decision Making What is the...

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