2. Economic reasoning

Scarcity means people want more than available time, money, labor, land, attention, or other resources can provide. Identify the scarce resource in a scenario and reason why scarcity forces a choice even when no money changes hands.

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Opportunity cost is the value of the next best alternative given up when a choice is made. Compare explicit money costs with the fuller economic cost of a decision, including time and missed alternatives.

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Trade-offs appear when choosing more of one good, goal, or activity means accepting less of another. Reason through everyday constraints, such as a budget or a fixed evening, and state what must be sacrificed to get more of something else.

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Cost-benefit analysis compares the expected gains and losses from an option before choosing it. Sort relevant costs and benefits in a simple decision and explain why the best choice depends on the decision maker’s goals and constraints.

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Marginal analysis asks whether one more unit of an activity is worth doing by comparing marginal benefit with marginal cost. Decide when to keep going or stop in examples like studying another hour, producing another item, or buying an extra snack.

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Sunk costs are past costs that cannot be recovered and should not control current choices. Recognize the sunk cost fallacy in examples like unused tickets, failing projects, or subscriptions, then choose based on future costs and benefits.

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Incentives are rewards, penalties, prices, rules, or social pressures that change the costs and benefits people face. Predict how a change in incentives might alter behavior without assuming everyone responds in exactly the same way.

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Unintended consequences happen when people respond to a rule, price, or policy in ways the designer did not expect. Trace a simple chain of responses and spot how a well-meant action can create side effects or opposite results.

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Positive statements make claims about what is or what would happen, while normative statements make judgments about what should happen. Classify economic claims and rewrite mixed statements so evidence-based claims and value judgments are separated.

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Ceteris paribus means “all else equal,” a habit economists use to focus on one cause at a time. Use it to reason about a change, such as a higher price or longer commute, while noticing which real-world factors are being held aside.

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Efficiency focuses on using resources to create the most total value, while equity focuses on fairness in how benefits and costs are shared. Compare a policy or workplace rule by asking separately who gains, who loses, and whether the trade-off is worth it.

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Review this chapter with practice based on your mistakes.