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