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Unformatted text preview: up to attain something or satisfy a want. COST COST MODELS (or THEORY) MODELS (or THEORY) ± A model is a simplified description of reality used to understand real life situations. ± Economists use the cost/benefit principle as an abstract model of how a rational individual would choose among competing alternatives. 3 Cost/Benefit Subtleties ± Absolutes not proportions that matter ± Optimal decisions are made at the margin ± Ignore sunk costs Summary ± Economics is a social science studying human behavior, in particular the way individuals and societies choose among the alternative uses of scarce resources to satisfy wants and needs. ± Limited resources force people to face tradeoffs. ± Choosing one alternative over another generates a cost—opportunity cost ± Optimal decisions are made at the margin....
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