Economic Choices

Incentive

• Economics focuses on the choices people make

• Economic reasoning is used everywhere

• People make choices based on their perceptions of what is best for them

• People’s choices reflect their perceptions of the expected costs, benefits, & the alternatives they face

• The key to understanding human behavior lies in identifying incentives

• Incentives are rewards or punishments that influence people’s actions

• When incentives change, people’s behavior changes

• The 1st thing we must recognize is that people face trade-offs (alternative choices) w/ every economic decision

Opportunity Cost

• We live in a world of relative scarcity

• Scarcity forces people to choose between alternatives

• Individuals’ evaluation of alternatives is subjective

• The distinction between needs and wants is individual

• Societies have adopted different ways to deal with scarcity

• In economics, cost is related to opportunity cost- cost of the next best alternative use of money, time, or resources when one choice is made over another

• The opportunity cost of choosing one alternative is the value given up by not taking advantage of the next best alternative

• To choose is to refuse!• The decision to take the benefits

of one alternative means refusing the benefits of the next best opportunity

• You spend $5,000 on a used car• The OC = the value of the stereo, apt, vacation

you could have purchased• Even time has OC, the time you spend on one

thing could be spent on another

• We seldom make all or nothing decisions

• Life is an exercise in marginal decision making

• Decisions to continue or discontinue an activity are made by weighing the expected benefits against the expected costs

• SCARCITY, SCARCITY, SCARCITY!!!

• Societies must make consumption choices

• At the core of a society’s consumption choices is its choice about production