1.
1 Why study EconomIcs
Learning Objective: Identify three key reasons to study economics. Think of an example from your life in which
understanding opportunity costs or the principle of efficient markets could make a difference in your decision
making.
Why Study Economics?
There are three key reasons to study economics:
To understand how individuals and firms make decisions
Economics explains how people allocate scarce resources and make choices under constraints.
To understand how markets and economies function
It helps us analyze prices, inflation, unemployment, growth, and government policies.
To make better personal and business decisions
Economic reasoning improves decision-making by considering costs, benefits, and trade-offs.
Example from My Life
Understanding opportunity cost helps me make better decisions about time management.
For example, if I choose to spend three hours watching movies instead of studying for an exam, the opportunity
cost is the potential higher grade I could have achieved. Recognizing this helps me allocate my time more
efficiently.
Similarly, understanding the efficient market principle helps in investment decisions. If stock prices already reflect
all public information, I know that trying to “beat the market” using public news is unlikely to generate consistent
profits. Therefore, I may choose diversified long-term investments instead of speculative trading.
1.1 One of the scarce resources that constrain our behavior is time. Each of us has only 24 hours in a
day. How do you go about allocating your time in a given day among competing alternatives? How do
you go about weighing the alternatives? Once you choose a most important use of time, why do you not
spend all your time on it? Use the notion of opportunity cost in your answer.
Time is a scarce resource because each person has only 24 hours per day. Therefore, allocating time requires
making choices among competing alternatives such as studying, working, resting, exercising, and socializing.
I allocate my time by ranking activities according to their importance and expected benefits. For example,
preparing for exams or completing work assignments may provide long-term benefits, while entertainment
provides short-term satisfaction. I weigh alternatives by comparing their opportunity costs, which is the value of
the next best alternative that I give up.
For instance, if I choose to spend three hours studying, the opportunity cost is the leisure or rest I sacrifice. I do
not spend all my time on the single most important activity because the opportunity cost increases as I devote
more time to it. After a certain point, the additional benefit from studying one more hour becomes smaller than the
benefit from resting or doing another productive activity.
Thus, time allocation involves balancing marginal benefits and opportunity costs to achieve the most efficient use
of limited time.
1.2 Every Friday night, Gustavo pays $39.99 to eat nothing but crab legs at the all-you-can-eat
seafood buffet at the M Resort in Las Vegas. On average, he consumes 28 crab legs each Friday. What is
the average cost of each crab leg to Gustavo? What is the marginal cost of an additional crab leg?
Gustavo pays $39.99 at the all‑you‑can‑eat buffet at the M Resort in Las Vegas and eats 28 crab legs.
1⃣ Average Cost per Crab Leg
Average cost = Total cost ÷ Number of crab legs
39.99÷28=1.4339.99÷28=1.43
Average cost ≈ $1.43 per crab leg
This is simply the cost per unit when we divide total spending by quantity consumed.
2⃣ Marginal Cost of One Additional Crab Leg
Marginal cost = Extra cost of consuming one more crab leg.
Since it’s an all‑you‑can‑eat buffet, Gustavo pays the same $39.99 whether he eats 28 legs or 29.
The marginal cost = $0
Because eating one more crab leg does not increase his total payment.
Final Answer (Exam Style)
Average cost per crab leg ≈ $1.43
Marginal cost of an additional crab leg = $0