1.1 Scarcity and Decision Making

What is Economic???

The study of scarcity and its implications for the use of resources, production of goods and services, growth of production and welfare over time, and a great variety of other complex issues of vital concern to society.

What are the 4 economic problems?

1.  As a result of Scarcity, people must make choices

2. All choices have a cost

3. People rely on marginal analysis to maximize their satisfaction.

4. Incentives Matter

As a result of Scarcity, people must make choices(economic princiapl #1)

such as:

What to produce?

• Societies must decide on mix of goods to produce

How to produce?

• Decisions on production methods involve using resources efficiently

For whom to produce?

• How goods and services are distributed

All choices have a cost (Economic principal #2)

Everything has an opportunity cost.  This is what you give up to get something.

Trade-off

best next thing to what you’re giving up.

Marginal analysis

all about looking at the next step — the extra cost or benefit of doing one more of something.

Sunk Cost

the tendency to continue an endeavor, such as a project, decision, or investment, because of already invested resources (money, time, or effort) that cannot be recovered, even when continuing is no longer the most beneficial course of action

Incentives matter (principal #4)

Factors that motivate people to behave in a particular way is an incentive.

They work by altering your perception of MB and MC.