Friday, January 17, 2014

Costs and Benefits

I've often thought of economics as the "science of common sense". Humans weigh costs and benefits of different actions and choose the action that yields the highest net benefit within their constraints. Constraints can be time, money, ability, etc.; but, whatever the constraint the  person must think about their available resources and all the possible uses for those resources.

I teach my students that when benefits increase (decrease) for a given action we should expect more (less) of that action. When costs increase (decrease) for an action we should expect less (more) of that action. Sometimes teachers illustrate this simple premise through the following exercise:

1. Set a penny on the desk and tell any student they can come and get the penny if they like.

2. Set a quarter on the desk and tell any student they can come and get the quarter and penny if they like.

3. Set a dollar bill on the desk and tell any student they can come and get the dollar and quarter and penny if they like.

By this time students are starting to come up and pick up the dollar and twenty six cents from the desk.

4. Set a five dollar bill on the desk ... LOTS OF STUDENTS come up trying to get it.

This just illustrates the point that as costs and benefits change behavior also changes.

Unfortunately (and fortunately I suppose) economics is not common sense to most people. The unfortunate part is that voters are susceptible to fraudulent claims that have little logic or reason behind them. The fortunate part, I guess for me, is that because economics is not common sense people are still willing to pay money to grasp the concepts of economics.

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