Economics as a collection of analytical tools - concepts of Essay

Economics as a collection of analytical tools - concepts of rationality, opportunity cost, comparative advantage and the margin - Essay Example 87) B. Venkatesh says that "rationality in economics is to do with greed! People are called rational if they desire to improve their economic well-being. That is, they want more wealth, and they want it sooner than later. Thus, if you are offered Rs 1 lakh, and you refuse it, you may be deemed irrational by the economists". (Venkatesh, 1990, p.2) Count the following decision problem. A consumer must choose between 2 actions, videlicet, A and B. She/he acquires 10 dollars from action A and 5 dollars from action B. On the supposition that the consumer prefers more money to less one, he is rational if he chooses action A; a consumer choosing action B is irrational. In the context of this mere example, the rationality concept is trivial, partly because there is no ambiguity in the decision problem (i.e., the set of probable actions and the payback from each action are clear with certainty). Nevertheless, in the context of examples with uncertainty, the concept of rationality is by no means trivial. For instance, consider the following modification to the decision problem stated earlier. If the consumer selects action B, then a fair coin is tossed, and if he is lucky and heads turned up then the consumer gets 15 dollars, and if tails turned up then he gets 5 dollars. In this much more complicated decision problem, it is not clear whether it is as yet rational for the person to choose action A. Opportunity cost is an economical term that means the cost of something in terms of an opportunity foreseen and the benefits that could be obtained from that opportunity, or also understood as the most valuable foreseen alternative. The opportunity cost concept is used in CBA to adjust a dollar value on the inputs necessary to execute policies. The opportunity cost of using an input to execute the policy is its value in the best alternative usage. It assesses the value of what people should forgo to use the input for the policy fulfillment. For instance, if a city wants to construct a hospital on available land it owns, the opportunity cost is another possibility that might have been used with the land and funds for construction instead. Having built the hospital, the city has lost the opportunity to construct a sports centre on that place, or the opportunity to sell that piece of land to decrease the city's debts, and so forth. Simply said, the opportunity cost of spending a Friday night having fun could be the sum of money you could have made if you had spent that time in labor. Opportunity cost is not determined in monetary terms, but in terms of anything that constitutes value for the person or persons carrying out the assessment. The use of the opportunity cost concept seeks for the latent cost of each and every separate economic decision. Incompetence in the economic concept of opportunity cost has induced general economic mistakes, like "the broken window fallacy" reported by Frederic Bastiat. According to Frederic Bastiat, it is not possible to have everything promoted at the expense of everything else. This calls up his well-known definition describing the state, "the great fictitious entity by which everyone seeks to live at the expense of everyone else" (Bastiat, 1975, p.144). A. Smith says "If among a nation of hunters, for