BEO6600 · Business Economics
Economic Way of Thinking
Economics is the study of choice under scarcity: human wants are effectively unlimited, but the resources to meet them — time, labour, capital, land — are finite, so every individual, firm and society must choose. Session 1 of BEO6600 (Mankiw's ten principles) reduces to four moves you will use in every later model: every choice has an opportunity cost (the next-best alternative forgone, ignoring sunk costs); rational people decide at the margin, doing more while marginal benefit exceeds marginal cost; people respond to incentives; and the production possibilities frontier (PPF) draws scarcity, efficiency and growth in a single bowed-out curve. The closed-book exam tests this as concept-check MCQ and true/false — name the opportunity cost, read a point on the PPF, apply MB = MC, and classify a statement as positive or normative.
What this chapter covers
- 011.1 Scarcity and the economic problem
- 021.2 The Ten Principles of Economics (three families)
- 031.3 Opportunity cost (and why sunk costs are irrelevant)
- 041.4 Thinking at the margin: the MB = MC rule
- 051.5 The production possibilities frontier (PPF)
- 06Efficient, inefficient and unattainable points; growth as an outward shift
- 071.6-1.8 Models, the circular flow, positive vs normative, efficiency vs equity
Worked example: a marginal choice with a sunk cost
- +1(a) Compare MB and MC of the next wrap. Marginal benefit = the $9 it sells for; marginal cost = the $4 of extra inputs. The $300 pitch fee is a sunk cost — the same whatever the van does next — so it is irrelevant to this decision.
- +1Decide: MB $9 > MC $4, so make the wrap — net benefit rises by $5. Ignoring the sunk pitch fee is the point of the question.
- +1(b) Opportunity cost is the value of the next-best use of the input. If the worker's time could instead earn $20, that $20 forgone is the opportunity cost of using the time here — it belongs in the true marginal cost of the activity.
- +1(c) Stop where MB = MC. Keep making wraps while each adds more benefit than cost; the profit-maximising quantity is the one where marginal benefit has fallen to meet marginal cost.
Key terms
- Scarcity
- The gap between unlimited wants and the finite resources available to satisfy them. Scarcity is the root reason every individual, firm and society must make economic choices — and every choice is, at the same instant, a decision not to do something else.
- Opportunity cost
- The value of the next-best alternative forgone when you make a choice — the single best thing you gave up, not the sum of everything you did not do, and not just the dollar price on the tag. For students the biggest opportunity cost is usually their time.
- Sunk cost
- Money already spent that cannot be recovered — a non-refundable deposit, last term's fees. Because it is the same whatever you choose next, it is irrelevant to a rational forward-looking decision; only marginal benefit and opportunity cost of the next action matter.
- Marginal change
- A small incremental adjustment to an existing plan — a little more or a little less. Rational agents keep doing an activity while marginal benefit exceeds marginal cost (MB > MC) and stop where MB = MC, the point that maximises net benefit.
- Production possibilities frontier (PPF)
- A curve showing every combination of two goods an economy can produce when its resources and technology are fully and efficiently used. A point on it is efficient, inside it is inefficient (wasted resources), outside it is unattainable; it is bowed out because of increasing opportunity cost, and growth shifts the whole curve outward.
Economic Way of Thinking FAQ
What is the difference between opportunity cost and what I actually spent?
Opportunity cost is the value of the next-best alternative you gave up, which is not the same as the cash you handed over. If you spend an evening studying, the opportunity cost is the wage or leisure you forgo — and a sunk cost you already paid (a non-refundable fee) is not part of it at all, because it is the same whatever you do next. The exam's recurring trap is confusing what you spent with what you gave up.
How do I read a point as efficient, inefficient or unattainable on the PPF?
A point exactly on the curve is efficient (no waste). A point inside the curve is inefficient — resources are idle or underused, like unemployment. A point outside the curve is unattainable with current resources and technology. Moving from inside the curve to on it is just ending waste, not growth; growth is the whole curve shifting outward.
Why is the PPF bowed out rather than a straight line?
Because of increasing opportunity cost: resources are not equally suited to producing both goods, so as you push production of one good further you must give up ever-larger amounts of the other. The slope at any point is the opportunity cost there, and it rises as you specialise. If a question instead draws a straight-line PPF, opportunity cost is constant — don't say 'increasing' out of habit.
What is the difference between a positive and a normative statement?
A positive statement is about what is — it can be confirmed or refuted by evidence ('a price floor on milk creates a surplus'). A normative statement is about what ought to be — it rests on values and cannot be settled by data alone ('the government should raise the minimum wage'). The exam wants you to label which is which; economists disagree both because of differing positive theories and differing values.
Exam move
Run a four-question checklist on any decision problem: (1) what is scarce, and what is the trade-off? (2) what is the opportunity cost of the chosen option — the next-best forgone, ignoring sunk costs? (3) is this a marginal choice, so compare MB to MC? (4) is the claim positive or normative? For the PPF, always label both axes and at least two points, read the slope as opportunity cost, and check whether the curve is bowed out (increasing cost) or straight (constant cost). Principle 10's inflation-unemployment trade-off (the short-run Phillips curve) is recognition-level here — know it slopes down and is short-run; you will not be asked to compute it.
