Chapter 1/Part 3
What Is Economics?
ECON1211: Principles of Microeconomics
Department of Economics and Finance
College of Economics and Political Science
Sultan Qaboos University
Usamah F. Alfarhan
The Economic Way of Thinking: Important
Concepts:
• Rationality: A rational person is someone with well-defined objectives
and who tries to fulfill those objectives as best as they can.
• Marginal cost: The incremental cost of a given decision or action.
• Marginal benefit: The incremental benefit of a given decision or
action.
• Opportunity cost: The value of the next best alternative to the
decision or action taken. This cost is the total of all explicit and
implicit costs.
• Trade-off: The fact imposed by scarcity, that something has always to
be given up if we decide to get something else.
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Important Elaborations:
• Rationality has nothing to do with morality or legality.
• Marginal costs and benefits of activities must be measured in a way that enables
comparisons, which is not always easy.
• People respond to incentives that alter marginal benefits and/or costs.
• Opportunity cost is not the value of all your alternatives, because you can never
choose all your alternatives. You chose one thing at a time!
• Trade-offs are a fact and phenomenon, not something we necessarily assign a
dollar value to.
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How Do We Make Economic Decisions?
We take a decision by applying the cost-benefit principle
THAT IS
EXTRA BENEFIT OF AN ACTION > EXTRA COST OF AN ACTION  DO IT
EXTRA BENEFIT OF AN ACTION < EXTRA COST OF AN ACTION  DONTDO IT
EXTRA BENEFIT OF AN ACTION = EXTRA COST OF AN ACTION  INDIFFERENT
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Example
• You want to decide on your next meal, and you go to a restaurant.
• You can identify your benefit in terms of dollar values for each item
on the menu. That means, you can express the maximum amount of
money you would be willing and able to pay for a given meal BEFORE
seeing the price and REGARDLESS of the price
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Your Benefit Identification:
ITEM
Benefit ($)
Mutton Kabsa
5
Grilled Grouper
4
Pizza
2.5
Hamburger with Fries
3
Steak with Mashed Potato
6
Chicken Salad with Italian
Dressing
2
Omani Shiwa
3.5
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Your Benefit Identification:
ITEM
ITEM
Benefit ($)
Rank
Mutton Kabsa
5
Mutton Kabsa
2nd
Grilled Grouper
4
Grilled Grouper
3rd
Pizza
6th
Pizza
2.5
Hamburger with Fries
3
Hamburger with Fries
5th
Steak with Mashed Potato
6
Steak with Mashed Potato
1st
Chicken Salad with Italian
Dressing
2
Chicken Salad with Italian
Dressing
7th
Omani Shiwa
4th
Omani Shiwa
3.5
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Decision if Meal is Free:
ITEM
Benefit ($)
Opportunity
Cost
ITEM
Rank
Mutton Kabsa
5
Mutton Kabsa
2nd
Grilled Grouper
4
Grilled Grouper
3rd
Pizza
6th
Pizza
2.5
Hamburger with Fries
3
Hamburger with Fries
5th
Steak with Mashed Potato
6
Steak with Mashed Potato
1st
Chicken Salad with Italian
Dressing
2
Chicken Salad with Italian
Dressing
7th
Omani Shiwa
4th
Omani Shiwa
3.5
Choice
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Cost-Benefit Principle
ITEM
Benefit ($)
Cost ($)
Net Benefit ($)
Mutton Kabsah
5
4.5
0.5
Grilled Groupper
4
4
0
2.5
1.5
1
Hamburger with Fries
3
1.5
1.5
Steak with Mashed Potato
6
7
-1
Chicken Salad with Italian Dressing
2
3.5
-1.5
3.5
4
-0.5
Pizza
Omani Shiwa
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Economic Surplus = Benefit - Cost
Cost-Benefit Principle
ITEM
Net Benefit ($)
Rank
0.5
3rd
Grilled Groupper
0
4th
Pizza
1
2nd
Hamburger with Fries
1.5
1st
Steak with Mashed Potato
-1
6th
Chicken Salad with Italian Dressing
-1.5
7th
Omani Shiwa
-0.5
5th
Mutton Kabsah
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Decision if Meal is Not Free:
ITEM
Net Benefit ($)
Rank
0.5
3rd
Grilled Groupper
0
4th
Pizza
1
2nd
Hamburger with Fries
1.5
1st
Steak with Mashed Potato
-1
6th
Chicken Salad with Italian Dressing
-1.5
7th
Omani Shiwa
-0.5
5th
Mutton Kabsah
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Decision if Meal is Not Free:
ITEM
Net Benefit ($)
Rank
Opportunity Cost
0.5
3rd
Grilled Groupper
0
4th
Pizza
1
2nd
Hamburger with Fries
1.5
1st
Steak with Mashed Potato
-1
6th
Chicken Salad with Italian Dressing
-1.5
7th
Omani Shiwa
-0.5
5th
Mutton Kabsah
Choice
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Economist as Social Scientist: Positive versus
Normative Economics
• Normative economic
statements say how
economic agents should
behave:
• Economics of “what ought
to be”  cannot be proven
true or false:
- Gas prices are too high
- Oman should organize more
sport event
- People should wear masks
during COVID-19.
Positive economic statements
predict how economic agents will
behave:
• Economics of “what is” 
focuses on facts and can be
proven with data:
- The price of crude oil in 2012 was
higher than in 2019
- Organizing a world cup costs
more in Qatar than in Germany
- The unemployment rate has
risen during the COVID-19
pandemic.
Unsrcambling Cause and Effect: Economic Models
• The task of economic science is to discover positive statements that are
consistent with what we observe in the world and that enable us to
understand how the economic world works.
• Economists create and test economic models.
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Unsrcambling Cause and Effect: Economic Models
• An economic model: A simplification or abstraction of the reality of
an economic phenomenon, that captures sufficient elements to
enable the understanding, explaining and predicting reality.
• Economic models rely on simplifying assumptions, such as:
- All other factors are constant, ceteris paribus.
- True in both directions, vice versa
• Such assumptions may not always be true, yet they are necessary for
abstraction and do not distort models’ explanatory power.
Example of an Economic Model:
• As the price of a good rises, the quantity demanded by a consumer falls,
such that:
Q = 100 – 2 Price
Notice that:
1. Everything else affecting the demand is held unchanged. This includes
gender, age, weather, health, culture, tastes, prices of other goods,
income …etc.
2. The effect holds for price increases, and vice versa for price decreases.
- Are those things, in reality, constant? NO!
- Do quantities necessarily respond to price increases and decreases the
same way? NO!
Is the model still useful in explaining consumer behavior? YES!
Unsrcambling Cause and Effect: Economic Models
A model is tested by comparing its predictions with the facts.
• But testing an economic model is difficult, so economists also use:
■ Natural experiments
■ Statistical investigations
■ Economic experiments
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Economics: A Social Science and Policy Tool
• Economist as Policy Adviser
• Economics is a toolkit for advising governments and businesses and for
making personal decisions.
• All the policy questions on which economists provide advice involve a blend
of the positive and the normative.
• Economics can’t help with the normative part—the goal.
• But for a given goal, economics provides a method of evaluating alternative
solutions—comparing marginal benefits and marginal costs.
Economists in the Economy
• Jobs for an Economics Major
• A major in economics opens the door to the pursuit of a masters or PhD and a
career as an economist.
• The work of economists varies enormously but it includes collecting and
analyzing data on the production and use of resources, goods, and services;
predicting future trends; and studying ways of using resources more
efficiently.
• Economists work in private firms, government, and international
organizations.
Economists in the Economy
• Economics majors
also work as
market research
analysts, financial
analysts, and
budget analysts.
• Figure 1.3 shows
the the relative
number of jobs for
economists and
analysts that use
economic ideas
and tools.
Economists in the Economy
Will Jobs for Economists Grow?
• The BLS forecasts that jobs for:
• 1. Economists with a PhD will grow by 6 percent.
• 2. Budget analysts will grow by 2 percent.
• 3. Financial analysts will grow by 12 percent.
• 4. Market research analysts will grow by 19 percent.
Economists in the Economy
Earnings of
Economics Majors
• Earnings of economics
majors vary a lot
depending on the job
and their
qualifications.
• Economists with a PhD
would expect to earn
about $100,000 a year
by mid-career.
Economists in the Economy
Skills Needed for Economics Jobs
• Employers look for five skills:
• 1. Critical-thinking skills.
• 2. Analytical skills
• 3. Math skills
• 4. Writing skills
• 5. Oral communication skills
END OF CHAPTER 1, P3
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