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The Economic Perspective LO1.1 Define economics and explain the economic perspective.Marginal Analysis: Comparing Benefits and Costs The economic perspective focuses largely on marginal analysis--comparisons of marginal benefits and marginal costs, usually for decision making.Facebook grants users free access to its platform to make sure that it has as many "eyeballs" as possible to sell to advertisers. Purposeful Behavior Economics assumes that human behavior reflects "rational self-interest."You may be treated to lunch, making it "free" from your perspective, but someone must bear the cost. The scarce inputs involved in creating the lunch include land, equipment, and farm labor. Because society could have used these resources to produce other things, it sacrifices those other goods and services in making the lunch available. Economists call such sacrifices opportunity costs: To obtain more of one thing, society sacrifices the opportunity of getting the next best thing that could have been created with those resources. The nearby Consider This story about Facebook discusses yet another example of a "free" product that is anything but.rvlsoft/Shutterstock Facebook spends over $50 billion every year updating its platform, running server farms, and paying its employees.Individuals and institutions look for and pursue opportunities to increase their utility--the pleasure, happiness, or satisfaction obtained from consuming goods and services.Because they weigh costs and benefits, their economic decisions are purposeful or rational, not random or chaotic."Purposeful behavior" does not assume that people and institutions are immune from faulty logic and therefore are perfect decision makers.They pay Facebook over $100 billion per year to boost content and target ads to specific individuals.To begin with, increasing one's own wage, rent, interest, or profit normally requires identifying and satisfying somebody else's wants!These self-interested, but unselfish, acts help maximize the givers' satisfaction as much as any personal purchase of goods or services.This economic perspective has several critical and closely interrelated features.Indeed, economists acknowledge that people are sometimes impulsive or irrational.Scarcity and Choice The economic resources needed to make goods and services are in limited supply.This scarcity restricts options and demands choices.Has Facebook figured out a way to overcome scarcity?But Facebook has figured out a way to more than cover its costs without charging its users a penny.They allocate their time, energy, and money to maximize their satisfaction."Purposeful behavior" simply means that people make decisions with some desired outcome in mind.Facebook's trick is to charge advertisers instead.Economists view things from a unique perspective.CONSIDER THIS...

The Economic Perspective LO1.1 Define economics and explain the economic perspective. Economists view things from a unique perspective. This economic perspective has several critical and closely interrelated features. Scarcity and Choice The economic resources needed to make goods and services are in limited supply. This scarcity restricts options and demands choices. Because we “can’t have it all,” we must decide what we will have and what we must forgo. At the core of economics is the idea that “there is no free lunch.” You may be treated to lunch, making it “free” from your perspective, but someone must bear the cost. The scarce inputs involved in creating the lunch include land, equipment, and farm labor. Because society could have used these resources to produce other things, it sacrifices those other goods and services in making the lunch available. Economists call such sacrifices opportunity costs: To obtain more of one thing, society sacrifices the opportunity of getting the next best thing that could have been created with those resources. The nearby Consider This story about Facebook discusses yet another example of a "free" product that is anything but. CONSIDER THIS… Is Facebook Free? rvlsoft/Shutterstock Facebook spends over $50 billion every year updating its platform, running server farms, and paying its employees. It also gives away its product for free to more than 3 billion users. Has Facebook figured out a way to overcome scarcity? No, it hasn’t. Scarcity is permanent. But Facebook has figured out a way to more than cover its costs without charging its users a penny. Facebook’s trick is to charge advertisers instead. They pay Facebook over $100 billion per year to boost content and target ads to specific individuals. Lesson One: If you are consuming a good or service and not paying for it, the cost is being borne by someone else. Lesson Two: Companies don’t usually give freebies to be nice; they do it as part of their business model. Facebook grants users free access to its platform to make sure that it has as many “eyeballs” as possible to sell to advertisers. Purposeful Behavior Economics assumes that human behavior reflects “rational self-interest.” Individuals and institutions look for and pursue opportunities to increase their utility—the pleasure, happiness, or satisfaction obtained from consuming goods and services. They allocate their time, energy, and money to maximize their satisfaction. Because they weigh costs and benefits, their economic decisions are purposeful or rational, not random or chaotic. “Purposeful behavior” does not assume that people and institutions are immune from faulty logic and therefore are perfect decision makers. They sometimes make mistakes. Nor does it mean that people’s decisions are unaffected by emotion or the decisions of those around them. Indeed, economists acknowledge that people are sometimes impulsive or irrational. “Purposeful behavior” simply means that people make decisions with some desired outcome in mind. Please note that rational self-interest is not the same as selfishness. To begin with, increasing one’s own wage, rent, interest, or profit normally requires identifying and satisfying somebody else’s wants! In addition, self-interested people routinely make personal sacrifices for others. They, for example, contribute time and money to charities because they derive pleasure from doing so. And parents help pay for their children’s education for the same reason. These self-interested, but unselfish, acts help maximize the givers’ satisfaction as much as any personal purchase of goods or services. Marginal Analysis: Comparing Benefits and Costs The economic perspective focuses largely on marginal analysis—comparisons of marginal benefits and marginal costs, usually for decision making. To economists, “marginal” means “extra,” “additional,” or “a change in.” Most choices or decisions involve changes in the existing state of affairs. Page 3 Should you attend school for another year? Should you study an extra hour for an exam? Should a business expand or reduce its output? Should government increase or decrease its funding for a missile defense system? Each option involves marginal benefits and marginal costs. In making choices rationally, the decision maker must compare those two amounts. Example: You and your significant other are shopping for an engagement ring. Should you buy a -carat diamond or a 1-carat diamond? The marginal cost of the larger diamond is the added expense beyond the cost of the smaller diamond. The marginal benefit is the perceived lifetime pleasure (utility) from the larger stone. If the marginal benefit of the larger diamond exceeds its marginal cost (and you can afford it), buy the larger stone. But if the marginal cost is more than the marginal benefit, you should buy the smaller diamond instead—even if you can afford the larger stone! In a world of scarcity, the decision to obtain the marginal benefit associated with some specific option always includes the marginal cost of giving up something else. The money spent on the larger diamond means forgoing some other product. An opportunity cost—the value of the next best thing given up—is always present whenever a choice is made.