Economic Choices
Individuals and businesses have unlimited wants and needs. However, the economic resources that can be used to meet their needs are limited. The mismatch of unlimited wants and needs and limited economic resources is known as the basic economic problem. You may have identified several products you want to buy but you don't have enough money for all of them. Your school may be facing cutbacks on certain classes or extracurricular activities because operating costs are increasing faster than the annual budget. A business may want to expand in order to produce more products but does not have access to adequate land for a new larger building. A country may not be able to provide adequate health care for all of its citizens because it does not have enough doctors or hospitals.
The basic economic problem results from scarcity. Scarcity means not having enough resources to satisfy every need. Scarcity affects everyone, but some people are more affected than others. People with limited income have to carefully choose the best way to spend their money just to meet their basic needs. Countries with few natural resources or a poor education system may not be able to produce enough products and services for their citizens. If roads, bridges, and railways are not well maintained, people may not be able to easily obtain the variety of products and services found in other areas.
Everyone has to make financial decisions based on scarcity. Individuals and families must decide how to spread their income among all of the things they want and need. City, state, and national governments must cope with the problem of providing the many services citizens demand using the tax dollars they collect. In each case, someone has to make the difficult choices.
Scarcity forces you to make choices or decisions among the alternatives. How do you decide which option is best? You usually choose the things you want the most or can afford. Suppose you earn $75 a week from a part-time job. If you spend the money you earned this week on a new pair of shoes, you will not have enough left over to spend on a movie and pizza with your friends on Saturday night. Due to the limited resources or amount of money you have, you cannot afford everything at the same time. You must make a choice by deciding which of your wants—the shoes or pizza and movie—you want the most. How do you determine which of these two options will satisfy you the most?
Following a logical process can help you make better decisions. It is a proven way to make many decisions, but is especially useful for making important economic decisions. Economic decision-making is the process of choosing which needs and wants will be satisfied. Once you learn the process, your decision-making will be easier and the process may lead to better choices.
Most of the choices you make result from considering a number of alternatives. When you decide on one alternative, you give up on the other alternatives you might have chosen. When you give up something to have something else, you are making a trade-off . You aren't able to buy a pair of shoes because you decided to spend your money on a movie and pizza with your friends.
The decision-making process helps you select the best and most satisfying alternative from among a set of choices. Economists recommend that you evaluate an alternative by considering the opportunity cost of the decision. The opportunity cost is the value of the next-best alternative that you were not able to choose. In making a decision, part of your choice will be what you are giving up by the choice you make. The benefit you get from your choice should be greater than the benefit from the next-best choice.
Businesses carefully calculate the opportunity costs of decisions before they make a decision about how they will invest their money. If they use money to purchase land for a new building, what choices must they give up? Would there be a greater value if they spent the money to purchase new equipment that is faster and more reliable? Part of the cost of the land is the missed opportunity to have better equipment.
The basic economic problem results from scarcity. Scarcity means not having enough resources to satisfy every need. Scarcity affects everyone, but some people are more affected than others. People with limited income have to carefully choose the best way to spend their money just to meet their basic needs. Countries with few natural resources or a poor education system may not be able to produce enough products and services for their citizens. If roads, bridges, and railways are not well maintained, people may not be able to easily obtain the variety of products and services found in other areas.
Everyone has to make financial decisions based on scarcity. Individuals and families must decide how to spread their income among all of the things they want and need. City, state, and national governments must cope with the problem of providing the many services citizens demand using the tax dollars they collect. In each case, someone has to make the difficult choices.
Scarcity forces you to make choices or decisions among the alternatives. How do you decide which option is best? You usually choose the things you want the most or can afford. Suppose you earn $75 a week from a part-time job. If you spend the money you earned this week on a new pair of shoes, you will not have enough left over to spend on a movie and pizza with your friends on Saturday night. Due to the limited resources or amount of money you have, you cannot afford everything at the same time. You must make a choice by deciding which of your wants—the shoes or pizza and movie—you want the most. How do you determine which of these two options will satisfy you the most?
Following a logical process can help you make better decisions. It is a proven way to make many decisions, but is especially useful for making important economic decisions. Economic decision-making is the process of choosing which needs and wants will be satisfied. Once you learn the process, your decision-making will be easier and the process may lead to better choices.
Most of the choices you make result from considering a number of alternatives. When you decide on one alternative, you give up on the other alternatives you might have chosen. When you give up something to have something else, you are making a trade-off . You aren't able to buy a pair of shoes because you decided to spend your money on a movie and pizza with your friends.
The decision-making process helps you select the best and most satisfying alternative from among a set of choices. Economists recommend that you evaluate an alternative by considering the opportunity cost of the decision. The opportunity cost is the value of the next-best alternative that you were not able to choose. In making a decision, part of your choice will be what you are giving up by the choice you make. The benefit you get from your choice should be greater than the benefit from the next-best choice.
Businesses carefully calculate the opportunity costs of decisions before they make a decision about how they will invest their money. If they use money to purchase land for a new building, what choices must they give up? Would there be a greater value if they spent the money to purchase new equipment that is faster and more reliable? Part of the cost of the land is the missed opportunity to have better equipment.
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The Decision-Making Process
Part 1 the Profit - Decision-Making
You make better decisions when you use a thoughtful process rather than letting your emotions lead you to a quick choice. An effective decision-making process involves six steps. You will be asked to use the process shown in Figure 1-1 many times as you proceed through the chapters in this book. You can also use it when making everyday decisions. Businesses and individuals use the process as they choose the best uses for their limited resources.
Define the Problem
For every decision, the problem must be clearly defined in order to make a decision that will lead to a satisfying solution. If you only have two hours available to study for three tests, your problem is how to best use the limited amount of time to prepare for the tests.
Identify the Choices
It is common for you to face choices with many alternatives. Earlier we identified a problem deciding on the best use of $75. Along with spending money on shoes or the movies and pizza, some other choices you might face are covering your normal daily expenses and the need to save money for college. In fact, there are many ways you might choose to spend or save your $75. It is important to identify and then consider all of the alternatives when making a decision.
Evaluate the Advantages and Disadvantages of Each Choice
You might find it helpful to write down your choices and then list the advantages and disadvantages of each. If you buy the shoes, you will be able to wear them many times. It means you will miss the fun of pizza and a movie with friends on the weekend. If you choose to save some of the money, you may be able to make a larger purchase later. You and your friends may determine a less expensive way to spend your time on the weekend.
Choose the Best Alternative
Select the choice that you believe will be the best for you at this particular time. Even if you have done a good job with the first three steps, this is often a difficult step. Realize that choices have consequences both now and in the future. Remember that opportunity costs affect your decision.
Act on Your Choice
Once you have made what you believe is the best decision, do whatever you have chosen. If you have decided to spend your money on a movie and pizza with your friends, go and enjoy yourself. Try not to worry about the choices you have decided against. Rethinking your choices or regretting your decision after it is made can take away from the activity you decided upon. Life is full of choices. No matter what you do, there will be times when you will regret a decision even if you carefully considered the alternatives. The next step will help you deal with those situations.
Review Your Decision
After you have had a chance to experience the results of your choice, it is important to review your choice. On a scale of one to ten, how would you rank your decision in terms of the level of satisfaction it provided? What was good and not so good about it? If you had to do it over again, would you make the same choice? Given what you know now, do you think there was a better alternative? Were there consequences you hadn't identified?
Based on your review of the decision, how well did you follow the steps of the decision-making process? This step gives you an opportunity to think about your decision and learn from it. Next time you face a similar decision, you may be more comfortable with your choices or make a different decision based on what you learned.
Define the Problem
For every decision, the problem must be clearly defined in order to make a decision that will lead to a satisfying solution. If you only have two hours available to study for three tests, your problem is how to best use the limited amount of time to prepare for the tests.
Identify the Choices
It is common for you to face choices with many alternatives. Earlier we identified a problem deciding on the best use of $75. Along with spending money on shoes or the movies and pizza, some other choices you might face are covering your normal daily expenses and the need to save money for college. In fact, there are many ways you might choose to spend or save your $75. It is important to identify and then consider all of the alternatives when making a decision.
Evaluate the Advantages and Disadvantages of Each Choice
You might find it helpful to write down your choices and then list the advantages and disadvantages of each. If you buy the shoes, you will be able to wear them many times. It means you will miss the fun of pizza and a movie with friends on the weekend. If you choose to save some of the money, you may be able to make a larger purchase later. You and your friends may determine a less expensive way to spend your time on the weekend.
Choose the Best Alternative
Select the choice that you believe will be the best for you at this particular time. Even if you have done a good job with the first three steps, this is often a difficult step. Realize that choices have consequences both now and in the future. Remember that opportunity costs affect your decision.
Act on Your Choice
Once you have made what you believe is the best decision, do whatever you have chosen. If you have decided to spend your money on a movie and pizza with your friends, go and enjoy yourself. Try not to worry about the choices you have decided against. Rethinking your choices or regretting your decision after it is made can take away from the activity you decided upon. Life is full of choices. No matter what you do, there will be times when you will regret a decision even if you carefully considered the alternatives. The next step will help you deal with those situations.
Review Your Decision
After you have had a chance to experience the results of your choice, it is important to review your choice. On a scale of one to ten, how would you rank your decision in terms of the level of satisfaction it provided? What was good and not so good about it? If you had to do it over again, would you make the same choice? Given what you know now, do you think there was a better alternative? Were there consequences you hadn't identified?
Based on your review of the decision, how well did you follow the steps of the decision-making process? This step gives you an opportunity to think about your decision and learn from it. Next time you face a similar decision, you may be more comfortable with your choices or make a different decision based on what you learned.