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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. 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. This is how we approach “which one” questions. MARGINAL ANALYSIS: DECIDING HOW MUCH? Marginal benefit is the additional benefit of doing something one more time. Marginal cost is the additional cost of doing something one more time. This is how we approach “how much” questions. Marginal Analysis Simulation 1A • Gargi • Shaanti • Katharine Sean C Neehar Allen Noah Henna Ryan • James • Matthew • Chloe Dexter Devin Tiffany Sean W Michelle Deeksha • Andrew, Obi, AJ 2A • Katie • Erika • Emily Jack Mia J Meha Taha Ben Jack • Mia B • Jeeshan • Eddie Josh Sam Alexandra Ester Tarun Chris • Dylan, Thriaksh, Joel 1B • Alexa • Amanda • Thomas Lauren Eric Maryam Andrew Olivia Andrew • Dominick • Kelli • Purab • Fei Odhran Winston Tiara Maggie Dean Audriti Christina • Yash, Kevin, Rohit 2B • Amanda • Mansi • Arnav Arielle Dolci Mason Bradley Devanshu Maddie • Brianna • Nikita • Dan Nathan Nidhi Matthew Arya Neha Nivi RATIONAL DECISION MAKING WHAT IS BEHAVIORAL ECONOMICS? 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 selfinterest. MISTAKES PEOPLE MAKE Mistakes in Decision Making Performances • As a table, create a 2 pg. script that describes a series of economic decisions which demonstrated two of the six mistakes previously shown. • The two mistakes which your group must depict will be drawn at random. • Presentations will be made to lead off the next class. • Share your constructions with me. • Skip one space between each actor’s line. • Have fun. 1A • Gargi • Shaanti • Katharine Sean C Neehar Allen Noah Henna Ryan • James • Matthew • Chloe Dexter Devin Tiffany Sean W Michelle Deeksha • Andrew, Obi, AJ 2A • Katie • Erika • Emily Jack Mia J Meha Taha Ben Jack • Mia B • Jeeshan • Eddie Josh Sam Alexandra Ester Tarun Chris • Dylan, Thriaksh, Joel 1B • Alexa • Amanda • Thomas Lauren Eric Maryam Andrew Olivia Andrew • Dominick • Kelli • Purab • Fei Odhran Winston Tiara Maggie Dean Audriti Christina • Yash, Kevin, Rohit 2B • Amanda • Mansi • Arnav Arielle Dolci Mason Bradley Devanshu Maddie • Brianna • Nikita • Dan Nathan Nidhi Matthew Arya Neha Nivi
