Trade-Offs and Thinking on The Margin

The Case of Producing a Drug

• More testing means that approved drugs will have less side effects, but there’s two important trade-offs (drug lag and drug loss)
• More testing means good drugs are delayed
  • However, the longer it takes to bring good drugs to the market means the more people that were harmed because of how long it was in testing
• Drug lag example: you can die because an unsafe drug is approved and you can die because a safe drug has not yet been approved
• Drug loss example: you can die because an unsafe drug is approved and you can also die because a safe drug is never developed
  • Society faces a trade-off: more testing means the drugs that are approved are safer but it also means more drug lag and drug loss
  • We face trade-off because we don’t have enough resources to satisfy all of our wants
• Great economic problem: how to arrange our scarce resources to satisfy as many of our wants as possible

Opportunity Cost

• $Opportunity cost:$ value of the opportunities lost
  • Ex: what is the cost of attending college? Or What are the opportunities you’re losing when you attend college?
  • This would be the ability to have a full-time job
  • Room and board isn’t an opportunity cost because you would have to pay for it either way whether you went to college or not

Thinking on the Margin

• Example: Depending on where he drives, Robert weighs the cost and benefits and makes a decision if its worth it to go a little faster than the speed limit
• $Thinking on the margin:$ making choices by thinking in terms of marginal benefits and marginal costs
• $Marginal cost:$ additional cost from producing a little more
• $Marginal revenue:$ additional revenue from producing a little more
• $Marginal tax rates:$ the tax rate on an additional dollar of income