Question

How does the concept of “opportunity cost” and the idea of “tradeoffs” relate to decision-making?

Why does the term “opportunity cost of capital” mean?

What is “deciding on the margin”?

What is the difference between “positive economic analysis” and “normative economic analysis”?

Answer 1

1. In both economic and non-economic decisions individuals face the cost of opportunity. One of the simplest ways to consider the costs of opportunity for an person is to consider a student choosing to study. The student, by deciding to study, implicitly chooses not to go to a party, hang out with friends or catch up on some much-needed sleep. The opportunity cost in this case is not easily represented in dollars and cents but is just as true.

The idea of trade offs due to scarcity is formalized by the idea of the cost of opportunity. The opportunity cost of a option is the value of the best overlooked alternative. In other words, the opportunity cost of producing a bottle of water is the expense of making a bottle of soda, because you can only produce bottles of soda and water. Likewise, there's a cost of opportunity in everything: the cost of reading this is what you might do with your time instead (say, watching a film). When using scarce resources (and just about anything is a scarce resource), individuals and businesses are forced to make choices that cost the opportunity.

When individuals make choices, they do so by looking at the decision's potential cost and benefit. The single decision's cost or gain is called the marginal cost, or marginal gain. This is different from the cumulative or average: net marginal benefit (marginal benefit minus marginal cost) is the sum that will change overall benefit due to the single decision.

2. The opportunity cost of capital is the marginal return on investment overlooked by a company as it wants to use money for an internal initiative instead of spending cash in a marketable environment. Thus, if the estimated return on the internal project is lower than the anticipated rate of return on a marketable property, one should not invest in the internal project, assuming it that is the sole basis for the decision. The disparity between the returns on the two ventures is the opportunity cost of money.

3. When all the economic resources are limited, we must all make choices. When reading the O level lessons, one might think that we are making decisions about whether to use this or that. Regarding needs, though, we can not make a decision on whether to use them or not. For example, even if water prices are increasing, we will still be using water, we can not reduce water usage to zero. Price hikes, however, can result in people trying to reduce consumption a bit. That is where the concept of subjective decision-making comes in. A marginal choice is, the option to do something a little bit more or a little less.

4. Economics as a social science deals with forecasting or assessing the effect of changes in economic variables on human behavior. Scientific economics, commonly called constructive economics, seeks to decide 'if' or 'what's going to be.' Positive claims, assumptions, or hypotheses may be straightforward or complex, but they are basically about factual matters.Normative economic claims are related to the political, cultural and religious structures as they concern what should be. a normative argument is "one that makes, or is based on, a decision of value a decision of what is good and bad." Normative economics requires proposing special policy solutions as it uses ethical decisions as well as constructive economic experience. In view of the advocate's political views, normative economic assumptions are concerned with 'what should be.' Quality assessments are also the source of opposition over normative economic issues.