To Study Economics - Essay Example

Consumers decide about the goods and services they prefer to purchase while the objective of business firms is to decide on how to produce products and the variety of products to be produced. Government entities aim to provide public services and decide on the methods to finance them. The behavior of these varying sections of the society may be termed as purposeful behavior in terms of managing resources and finance, though it may be noted that institutions and people are not free from faulty decision-making because decisions are influenced by emotions and by people around the decision-maker.

Economists consider the marginal analysis while decision making; a comparison of marginal costs and marginal benefits. In this context, marginal means additional, extra, or a change in. For example, economists analyze whether a business should reduce or expand or whether the government should increase or decrease funds for a particular cause. A rational decision-maker must compare both marginal costs and benefits while making a choice. Economics gives significance to scientific methods to observe consumption behaviors and outcomes and derives hypotheses (cause and effect), tests and modifies the hypotheses using facts, and finally evolves them into economic theories or principles that predict the outcomes of specific actions.

Therefore, it is important to study economics, because economics is concerned with theories and methods that support facts about how institutions and individuals essentially behave in producing, consuming, and exchanging goods and services and thereby find a logical balance while consuming the available resources in this world (McConnell 2005 p.4-6).

2. What is your understanding of opportunity cost? Explain with the help of example(s).

For example, while shopping for a wedding ring, there are various options about the size of the diamond. The marginal cost of purchasing a larger diamond is the expense in addition to the cost of a small diamond. The lifetime pleasure of purchasing a larger diamond is the marginal benefit. In case the marginal benefit of purchasing the larger diamond is more than its marginal cost, the larger diamond can be purchased if it is affordable. However, if the marginal cost exceeds the marginal benefit, it is advisable to purchase the smaller diamond even if it is affordable. In this world of scarce resources, the decision to avail of marginal benefit related to a specific choice always involves the marginal cost of forgoing certain options. The price paid to purchase a larger diamond means forgoing the opportunity to purchase certain other products. The opportunity cost - the value of forgoing the next best thing Alex assists when a choice is finalized (McConnell 2005 p.5).

Opportunity cost may be further explained with an example when the budget is limited. A person is given an amount of $120 to make purchases from a book store. The person decides to confine the purchases to DVDs and paperback books that cost $20 and $10 each respectively. There are various combinations which the purchaser can choose to buy a set of either 3 DVDs 6 books for the precise value or make a lesser purchase. However, the person cannot purchase more Vue to include more books and DVD’s. The Division to forego the purchase of a DVD to buy books is the tradeoff and the decision to forego a certain number of books to purchase a DVD is the trade-offs buy DVDs.

Therefore, the choice made by the person to forego the purchase of a combination of more DVDs and books beyond the given budget is the opportunity cost in this example (McConnell 2005 p.8-9).