Key Economic Ideas

Key Economic Ideas

Econ 212

September 6, 2010

Key Economic Ideas

The three key economic ideas are people are rational, people respond to economic incentives, and optimal decisions are made at the margin. Economists believe that most people are rational most of the time. That rational people make decisions when the benefits outweigh the cost. Economists also believe that people will respond to economic incentives, which makes sense, if they want to encourage someone to do something give him or her some type of reward. An example of an incentive would be credit cards that offer rewards programs like American Express, people will continually use the card to receive the benefits such as electronics or gift cards. When optimal decisions are made at the margin, it refers to determining whether the extra or additional that they are doing is beneficial or detrimental.

A decision I made that compared the marginal benefits versus the marginal costs is when I bought my car. Last summer I started looking at purchasing a new vehicle, my current one, although not very old had a warranty that was getting ready to expire and while I loved the car, I had bad luck with it. I still had a car payment and would have had one for another three years, so that did not dissuade or add any benefits to the new vehicle purchase. What I really wanted was something similar in size, certain perks (remote start, satellite radio etc), a current warranty and if possible a lower car payment. I knew I wanted a GM vehicle, but because the car I currently had was no longer in production I had to look at the other models available. I managed to locate a car that I loved with the benefits I wanted and a lower car payment.

The benefits of the decisions was that I had a car with a warranty so any car repairs needed would be covered, I also had fewer miles and hopefully a more reliable form of transportation. The marginal cost ended up being less than the car that I had before that per...