1089 Words5 Pages
Dr. Gong Jie
National University of Singapore

Why Do We Study Economics
 People have to “Choose”
♦ Resources are scarce.
♦ There is No Such Thing as Free Lunch!

 Economics: the science of Rational Choice
♦ Rationality: the basic assumption
♦ Rational Choice: Economic agents use all the information available to make decisions that most efficiently satisfy their needs and achieve stated objectives.
♦ How do people make rational choice? This is the subject of

Paul A. Samuelson’s definition of Economics
 “Economics is the study of how men and society choose, with or without the use of money, to employ scarce productive resources, which could have alternative uses, to produce various
…show more content…
What is the cost if you run you own restaurant?  Suppose that you own a house on Orchard Road, and you decide to run a restaurant, your total cost would include: Explicit Cost:

Implicit Cost

Utility: electricity, water and gas

The rental income you give up


Your possible employment income

Furniture and Equipment
Wage paid to employees

Economic Modeling
 Models are simplifications…like maps
 Resemble reality
 Abstract from the rich details
 Help understand the fundamental forces

Endogenous vs Exogenous Variables
 Exogenous variables: Variables that have values that are taken as given in the model.
 Endogenous variables: Variables whose value is determined within the model being studied.
 Analyze the business of a lemonade stand:


Customer volume


Input price



Product Quality

# of competitors


Decision making has two components
 First, there is a goal
♦ Basic Managerial Objective: to maximize net benefits

Net Benefits = Total Benefits - Total Costs
 Profits = Revenue – Costs

♦ Objective function: functional relationship between the value of the goal, and the values of endogenous variables and exogenous variables.

 Second, there is a set of options taken to achieve the goal: ♦ How much of the endogenous variable should be used to maximize net benefits?

Find the optimal choice:
Marginal (Incremental) Analysis
 Marginal Benefits (MB): Change

More about Econs

Get Access