Thursday, September 2, 2010

This Or That?

We may not even realize how often we make decisions every day. We weigh options and choose the best of them. Seems pretty, ordinary right? Well, in formal economics terms, you are actually considering the marginal benefits (what is the additional gain of X?) and marginal costs (what is the additional cost of X?) of that particular act. See, you think like an economist without even knowing it!

Sure, you may think that you only weigh MBs and MCs when you are shopping at a grocery store (giant marshmallows or cookies?), but actually you are doing marginal analysis in all aspects of your life.

Consider Situation A (one that my friend recently encountered): Should I take my Calculus textbook home today?

Friend: "Ugh, my book is heavy and I had cross-country practice today. I'm too sore to lug this book home. But, if I don't, I'll have to carry it home tomorrow with my Physics textbook too." (insert friend's annoyed face here)

In economics speak, her marginal cost was the extra physical strength and work she needed to carry the book today and her marginal benefit was a fewer number of books to carry home the next day. If her MC > MB, would she have taken her book? No. If her MB > MC, would she have taken her book? Yes. Ah, but what if she decided that her MC = MB? She could have chosen an alternative.

Did you ever think that economics could apply to life and not just to numbers? Well, in fact, it can! That's how economics came to be a social science: combining numbers, terminology, and qualitative analysis with psychology, anthropology, and sociology. This blending of the two disciples perhaps is one of the elements of economics that traces back to its very core and makes it applicable to the majority of our world's population in a relatively systematic way.