Economic Choices and Decision Making

Three Basic Questions of Economics WHAT to produce HOW to produce FOR WHOM to produce The goal of Economics is to better understand these three basic questions

Trade-Offs Every decision that is made has several different options Economists identify these alternative choices as Trade-Offs Definition: Alternatives that must be given up when one choice is made over another

Opportunity Cost Opportunity Cost is the cost of the next best alternative Opportunity Cost is not necessarily measured in dollars and cents When you make a decision, the opportunity cost is measured by what was given up

Opportunity Cost Example: I give Jackson $10 and he can buy what ever he wants with the money. Jackson decides that a $10 foot long from Subway and 5 $2 candy bars are his best choices. He buys a sandwich. Jackson’s opportunity cost of choice would be 5 candy bars

Opportunity Cost Example: When Lizzie gets home from school she finds that the best two options are studying for her math test and playing video games Lizzie decide to play video games Her opportunity cost of playing video games is the time she could have spent studying

Building Simple Models Economists use simplified models to look at complex problems Economists use these models to analyze situations and make assumptions about the future The use of charts and graphs break down larger pieces of information into a more manageable size

Production Possibilities When looking at an economy, it can produce any number and combinations of goods and services Economists look at this and make a simplified model of what is happening The Production Possibilities Curve is a diagram representing various combinations of goods and services an economy can produce

Production Possibilities

Cost-Benefit Analysis A cost-benefit analysis is a way of thinking about a choice that compares the cost of an action to its benefits If you like two options equally, the option with the lowest cost would be the better choice because you would get more satisfaction per dollar spent A cost-benefit analysis can be as simple or as complex as possible.

Free Enterprise Economy A market economy in which privately owned businesses have the freedom to operate for a profit with limited government intervention Producers and Consumers determine WHAT, HOW, and FOR WHOM to produce Economics helps us understand the workings of a Free Enterprise economy and make better decisions

Becoming an entrepreneur Create a GOOD or a SERVICE that will satisfy a NEED or a WANT (WHAT to produce) Identify the LAND, LABOR, and CAPITAL inputs that you will need to produce your good or service (HOW to produce) Figure out what your target market is for your good or service (FOR WHOM to produce)