Much of the usefulness of economic theory can be found in its application to our personal economic life. That is to say, lurking behind such concepts as opportunity cost, present value, supply and demand, and competitive markets are applications to our everyday life. The goal of this essay is to understand the most important principles that we will learn by using Economics Today, but also to allow us to apply them to problems that face us today, tomorrow, and for the rest of our life. An effective treatment already exists for many diseases.
In these cases the effectiveness of a new treatment may be established by showing that the new treatment is as effective as the old one. For an economic evaluation accompanying a clinical equivalence or no inferiority trial it is important to decide before the start of the study on the appropriate research question. In many cases the objective of the economic evaluation will be to show equivalence or no inferiority of the cost-effectiveness of the treatments. This has major implications for the design and analysis of the economic evaluation.In this essay we propose methods for the analysis of economic equivalence and no inferiority studies that are similar to the methods applied to clinical equivalence and no inferiority trials. Furthermore, cost-effectiveness planes prove to be a valuable tool in the interpretation of the results in an economic equivalence or no inferiority trial.
The concepts described in the essay are illustrated using the results from an economic no inferiority trial. Perhaps we have been told by well-meaning friends or relatives that we should strive for perfection.A common proverb is: "If something is worth doing, it is worth doing well. " Now what exactly can that mean with respect to our life? Does it mean that every time we undertake any task we should continue doing that task until we are certain we have reached our version of perfection, or at least until weu are certain we can do no better? I think not. Every one of us is faced with constraints.
Indeed, life is one big hassle with the constraints that face each one of us. A major constraint in our life is time. Everyone faces a scarcity of time.Therefore, while you are engaging in the job of doing something to perfection, you are not engaging in any other job (or any other pleasure for that matter).
The quest for perfection involves use of time and hence is costly to you—you must give up other valuable alternatives to achieve it. Let's consider an example. Someone write a guide and he had to spend time developing an outline for it, writing down a first draft, correcting that draft in order to write a second draft, third draft. Then he sent the final draft of the manuscript it to his publisher.After electronic page makeup, finally, there was transfer into special code (HTML) so that the electronic files could be uploaded to the Web site. He had to proof the resulting electronic pages for any typographical errors.
Now why did he only do three drafts of this guide? Certainly he could have improved reviewed drafts. Also, he read the electronic page proofs three times before he approved the result. He could have read them four times or five times. Whatever typographical errors are still here would probably have been caught. But he didn't write a fourth draft and he didn't read the electronic page proofs again.
Why not? Because he made a decision that the additional benefits from the additional work would not be worth the additional costs to him. How did he calculate the benefits and how did he calculate the cost? With respect to the benefits, he looked at the potential improvement in the guide and how much more positively he and his professors would respond to an additional draft or an additional proofreading. He examined the additional cost, called the marginal cost, as the value of the time he would have had to give up to do that extra work.He didn't have an exact number in his head, but he knew he would take away time, for example, from extra research and proofreading for Economics Today. Our rule of thumb should be as follows: Undertake any activity up to the point at which the marginal benefit equals the marginal cost.
This rule usually does not lead to perfection. It applies to studying for exams, polishing our car, looking for a video to rent, or working on a report that our boss wants next week. We'll find this same rule in many chapters in Economics Today. For example, the hiring decisions by any employer are made in this way.
By the time we are in school we are told by adults that college is a great thing. And it is for most people. But then they sometimes tell us to "get all the education you can get. " That's when well-meaning adults start misdirecting us. If we were to take their advice seriously, we would plan a higher-education career consisting of a bachelor's degree, a master's degree and a number of post-doctoral fellowships.
Despite what our parents may have told us, those people who don't get advanced degrees are more than likely behaving rationally. What does rational mean in this instance? It means applying the rule of thumb.One does not engage in any activity past the point at which marginal benefit equals marginal cost. Going to school year after year eventually leads to the point at which marginal cost exceeds marginal benefit. What happens, of course, is that the law of diminishing marginal returns enters in to the learning process in which we are engaged. After a while, the incremental benefit of learning new skills starts decreasing as we continue to increase the inputs—our time, work effort, and money income.
At some point this decreasing marginal benefit drops below the increasing marginal cost.Why does marginal cost increase? It increases because as we obtain more education and get older, our earning capacity goes up. That means that our opportunity cost of not working (our forgone income because we are still in school) thereby goes up. My advice is, of course, stay in school—but only up to the point at which the marginal benefit of doing so just equals the marginal cost. Marginal analysis is the application of marginal thinking to a particular problem.
Marginal thinking allows us to make choices that will maximize the value of any resource you have, including our time.One important result of using marginal analysis is that we do not waste our time worrying about what economists call sunk costs. Sunk costs are those that are not affected by the decision at hand. The only thing that matters are marginal costs—those costs that are affected by the decision at hand. Consider one example: someone is waiting in line to renew his driver’s license. Does it matter how long he have waited in line? Not really, for that is a sunk cost.
Consider another example. He own a restaurant that is only open for dinner.He is trying to decide whether he should be open for lunch. If he ask his accountant, he may include as a cost of staying open at lunch some proportion of the rent, insurance, and other fixed costs. But these sunk costs are irrelevant.
He pay them whether he stay open for lunch or not. The only thing that matters is a comparison of the marginal cost of staying open for lunch compared to the marginal benefit—which would be your increased net revenues. Many people dreams is to own a house. There are lots of good reasons to want to own a house, not the least being pride of ownership.
Other benefits of owning a house include the ability to customize it to their own tastes and thereby give them more of a feeling of being "at home. " Also, any improvements in the structure or the land accrue to them, the owners, when they resell the house. And certainly they cannot forget that the purchase of a house and land has turned out to be a good and sometimes spectacular investment for many people. For example, those people who purchased houses many years ago in most parts of some region received a very high rate of return for a while.That is to say, the values of their property went up much faster than the rate of inflation. All of that sounds so good, one wonders why anyone would ever rent.
After all, rent payments simply go to a landlord, never to be seen again. Any increase in the market value of the house and land benefits the landlord, not the tenants. Hence, the common-sense notion is that paying rent is throwing away wealth. The moral of this story is that when you own a home, you are paying for the opportunity cost of the current market value of that home—its implicit rental value—no matter what you paid for it originally or the size of your mortgage.We may decide that economics would be a good major for us in college.
We may even decide that it would become a good career. But there are other reasons for wanting to study economics. In short, the training we will receive as an undergraduate major in economics does the following: To sum up, we have found out the answer of the question “Does economic theory have practical value”. By learning economics, we learn how to think in a way that is applicable to just about everything that we see, do, or read.Economics deals with vital current problems at the national level such as inflation, unemployment, pollution, poverty, health care, and economic growth.
Economics is a problem-based social science. The problems with which it is concerned are the central issues of our times, the ones you read about in newspapers and magazines and hear about on radio and television. They pervade all of politics. And as we have seen in this short essay, economic analysis can be applied to our everyday life. Economics at its heart is a very practical social science.
