Making Economic Decisions

Remember…• Scarcity • forces people to make decisions about how they will use

their resources

• Economic decision-making • requires people to consider all the costs and benefits of a

decisions

Economic Decisions• Opportunity Cost• The most desirable alternative given up as a result of a

decision

• Trade off: all of the alternative choices in a decisions• The trade-off is the other things you could have

• Ex: The opportunity cost of buying a car is now you don’t have that money for college.

Economic Decisions• Fixed Costs • Costs or expenses that are the same no matter how many

units of the good are produced• Examples:• Mortgage payments, rent

Economic Decisions• Variable Costs • Costs or expenses that change with the number of

products produced• These costs increase when production increases and

decrease when production decreases• Examples:• Wages, raw materials, electricity bill, water bill• Think: Make fewer cars, your factory is open less, and your electric

bill is lower

Economic Decisions• Total Costs • Fixed Costs + Variable Costs = Total Costs

Economic Decisions• Marginal Costs• The extra or additional cost of producing one addition

unit of a good• Example:• 30 bike helmets = $1500• 31 bike helmets = $1550 › marginal cost = $50

Economic Decisions• Marginal Revenue • The extra revenue that results from selling one additional

unit of a good

Economic Decisions• Cost-Benefit Analysis• Analysis that tells us to choose an action or make a

decision when the benefits are greater than the costs

Profit• A company’s goal is to make as much profit as possible• Profit• Money a company has made after costs have been

deducted• Companies increase profit by maximizing efficiency • Companies make more profit by adding more land, labor,

or capital