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About this unit

In any economy, the existence of limited resources along with unlimited wants results in the need to make choices. In this unit, we introduce concepts of opportunity costs and trade-offs, and illustrate these concepts by using the production possibilities curve. We then consider how different types of economies determine which goods and services to produce, how to produce them, and to whom to distribute them. This unit also covers why and how specialization and exchange increase the total output of goods and services, with a discussion of absolute and comparative advantage. Finally, we touch on the importance of property rights, the role of incentives in the functioning of free markets, and the principle of marginal analysis.

AP® is a registered trademark of the College Board, which has not reviewed this resource.

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Basic Economic Concepts | AP®︎/College Microeconomics | Khan Academy

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In any economy, the existence of limited resources along with unlimited wants results in the need to make choices. In this unit, we introduce concepts of opportunity costs and trade-offs, and illustrate these concepts by using the production possibilities curve.

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Thinking Like An Economist- Macro/MicroTopic 1.1

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Economic Systems and Macroeconomics: Crash Course Economics #3

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What is opportunity cost?

Opportunity cost refers to the value a person could have received but passed up in pursuit of another option.

This is one of the most fundamental concepts in economics and understanding opportunity cost is crucial to decision-making.

For example, when you dress up like a cow for a free chicken sandwich or wait in a long line to get a $1 sub for a restaurant promotion, you might actually not be getting that great of a deal. That "free" sandwich? Well, even if your cow costume was made with stuff you already had, you still gave up the opportunity to do something else with your time. Same goes for the $1 sandwich. All that time you spent in line cost you the opportunity to do something else - like working, studying, or even playing video games.

Opportunity cost is certainly a useful concept to our everyday lives. But economists also use this tool to determine the possible benefits of trade, which we'll explain in the video.

Want to learn more about the role of specialization in trade? Check out our Principles of Economics: Microeconomics section on Trade.

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What is opportunity cost? Opportunity cost refers to the value a person could have received but passed up in pursuit of another option. This is one of the most fundamental concepts in economics and understanding opportunity cost is crucial to decision-making.

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In economics, we talk about incentives quite a bit. But what are incentives?

Incentives are rewards and punishments that motivate behavior.

You encounter incentives all the time. Think about what will happen if you don't study for your economics exam. You might get a bad grade! But if you do devote time to learning the material, you'll be rewarded with a good grade. Your grades are a familiar example of an incentive.

But incentives can be an even bigger deal than your grades - think life or death situations (no, a "D" on your econ midterm will not actually cause death).

In the late 18th century, the British government hired ship captains to transport convicted felons to Australia. Many prisoners did not the survive the voyages because the conditions on the ships were so terrible. The ones that did make it weren't much better off, arriving sick, starved, and beaten.

The public was outraged. Parliament attempted to solve the problem with new regulations that required more humane treatment of the prisoners. But it didn't work.

Why not? Incentives were simply not aligned -- the captains were paid whether prisoners arrived dead or alive. How did one ingenious economist propose to alter the incentives for the captains? Find out in the video!

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In economics, we talk about incentives quite a bit. But what are incentives? Incentives are rewards and punishments that motivate behavior. You encounter incentives all the time. Think about what will happen if you don't study for your economics exam. You might get a bad grade!

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Introduction to Microeconomics | Marginal Revolution University

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Economics is much more than just numbers and graphs. In fact, we can use economics to explain much of what we encounter in our daily lives. For instance, why is customer service at your local restaurant usually better than that of the cable company?

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Economic Systems: Why is Communist China doing so well? Micro Topic 1.2

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Thinking Like An Economist- Macro/MicroTopic 1.1

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1. Land/Natural Resources

These are free gifts that are given by nature.Some common land or natural resources are water, oil, copper, natural gas, coal, and forests. These resources can be renewable, such as forests, or nonrenewable such as oil or natural gas. The income that resource owners earn in return for land resources is called rent.

2. Labor

This factor of production involves any kind of human input.If you have ever been paid for a job, you have contributed labor resources to the production of goods or services. The income earned by labor resources is called wages and is the largest source of income for most people.

3. Capital

Here capital refers to manufactured resources such as factories and machines.Some common examples of capital include hammers, forklifts, conveyer belts, computers, and delivery vans. The income earned by owners of capital resources is interest.

4. Entrepreneurship

An entrepreneur is someone who takes on risk and brings factors of production together. Entrepreneurs are a vital engine of economic growth helping to build some of the largest firms in the world as well as some of the small businesses in your neighborhood. The payment to entrepreneurship is profit.

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Four Factors of Production | Intelligent Economist

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These are free gifts that are given by nature.Some common land or natural resources are water, oil, copper, natural gas, coal, and forests. These resources can be renewable, such as forests, or nonrenewable such as oil or natural gas. The income that resource owners earn in return for land resources is called rent.

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AP Microeconomics: 1.1-1.2 Scarcity and Resource Allocation in Economic Systems

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What do economists think about strawberry smoothies? That depends on how good the kiwi flavor is instead-plus a range of other choices. Which stirs up the idea of opportunity cost.

How is opportunity cost defined in everyday life?

"Opportunity cost is the value of the next-best alternative when a decision is made; it's what is given up," explains Andrea Caceres-Santamaria, senior economic education specialist at the St. Louis Fed, in a recent Page One Economics: Money and Missed Opportunities.

The Scoop on Scarcity

We can't have everything we want in life. This is where scarcity factors in. Our unlimited wants are confronted by a limited supply of goods, services, time, money and opportunities. This concept is what drives choices-and, by extension, costs and trade-offs, Caceres-Santamaria says.

She uses the example of deciding to buy a $7 smoothie at the mall. She notes that many people would view the choice as a single one based on whether you want the drink.

Instead, she suggests wearing "a unique pair of 'economist glasses'" to see the decision differently, asking:

1. How much do I value this?

2. What am I giving up now to have this?

3. What am I giving up in the future to have this now?

Costs That Are Seen and Unseen

Our inclination is to focus on immediate financial trade-offs, but trade-offs can involve other areas of personal or professional well-being as well-in the short and long run.

That's why Caceres-Santamaria challenges us to consider not only explicit alternatives-the choices and costs present at the time of decision-making-but also implicit alternatives, which are "unseen" opportunity costs.

"It's about thinking beyond the present and assessing alternative uses for the money-that is, not being shortsighted," she writes.

What are some other examples of opportunity cost?

A student spends three hours and $20 at the movies the night before an exam. The opportunity cost is time spent studying and that money to spend on something else.

A farmer chooses to plant wheat; the opportunity cost is planting a different crop, or an alternate use of the resources (land and farm equipment).

A commuter takes the train to work instead of driving. It takes 70 minutes on the train, while driving takes 40 minutes. The opportunity cost is an hour spent elsewhere each day.

Is Opportunity Cost a Big Deal?

We might not consider lost studying time or $7 spent on a smoothie costly decisions, but what about bigger choices-like the decision to stretch and buy a more expensive home versus a starter home, or to spend $1,500 more on an upgraded trim package for your next car?

Caceres-Santamaria describes how opportunity costs are neglected even more when making higher priced purchases. Using the car-buying example, a consumer might default to thinking of the relative value of the $1,500 upgrade to the base price of the car, say, $18,500.

Rather than comparing the fancier configuration to the vehicle itself, it might be more helpful to ask what else that $1,500 could buy outright.

Why the Rush?

"Most of our decisionmaking that involves money is based on immediate or sooner-than-later consumption," Caceres-Santamaria notes. "The excitement of consuming today is valued significantly more than the thought of consuming in the future."

It's human nature: We grow impatient, tugged by the immediacy of a promised benefit versus a payoff that's possibly years down the road.

If seeing is believing, it's worth looking at the future value of money -a concept many of us have read about in retirement plan literature or heard from financial advisors.

The Future Value of Money

Example 1: The one-time windfall

Let's say you got a surprise $4,000 windfall and want to use it for a getaway trip. Why not? It's found money, so there's no loss to you-unless you think about the opportunity cost.

If you nixed the trip and plunked your money into an income-producing product that earned an average annual interest rate of 3%, compounded monthly, you could find yourself with a cool $5,397 in 10 years.

Wait another five years, and your funds could grow to $6,270. (Neither example factors in the effects of inflation and taxes owed.)

That's the added benefit in money terms. You'll also want to consider the experiences that an extra $1,400 or more-the future earnings on your $4,000-could make possible.

Example 2: Small, regular savings over time

That's an example of investing a single lump sum over time. What about the opportunity cost associated with daily purchases, such as the $4.49 caffè mocha you pick up three times a week? How much money could you find yourself with if investing that $54 each month rather than spending it?

If you dropped the coffee (careful!), invested $54 per month and earned the same 3%, compounded monthly, you'd have $7,619 to dunk your doughnut into in 10 years.

Too long to forego that regular mocha? Cutting the time frame in half to five years would still give you $3,554 in savings. (Again, these sums don't include the impact of inflation and taxes.)

These examples are striking, especially when considering that a $4.49 caffè mocha habit over time can dwarf the seemingly larger decision to splurge on a $4,000 getaway trip.

Want to test some of your own opportunity cost what-ifs? Caceres-Santamaria encourages consumers to avoid "autopilot" mode when it comes to financial decisions. Start small-even with a pack of gum-and brainstorm as many alternative uses for your money as you can.

Additional Resources

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Real-Life Examples of Opportunity Cost | St. Louis Fed

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What do economists think about strawberry smoothies? That depends on how good the kiwi flavor is instead-plus a range of other choices. Which stirs up the idea of opportunity cost. How is opportunity cost defined in everyday life?

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Application - In this episode, you can listen to what scarcity does to a person in real life.

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subscribe to Hidden Brain podcast

Have you ever noticed that when something important is missing in your life, your brain can only seem to focus on that missing thing?

Two researchers have dubbed this phenomenon scarcity, and they say it touches on many aspects of our lives.

"It leads you to take certain behaviors that in the short term help you to manage scarcity, but in the long term only make matters worse," says Sendhil Mullaianathan, an economics professor at Harvard University.

Several years ago, he and Eldar Shafir, a psychology professor at Princeton, started researching this idea. Their theory was this: When you're really desperate for something, you can focus on it so obsessively there's no room for anything else. The time-starved spend much of their mental energy juggling time. People with little money worry constantly about making ends meet.

Scarcity takes a huge toll. It robs people of insight. And it helps to explain why, when we're in a hole, we sometimes dig ourselves even deeper.

This week on Hidden Brain, we'll explore the concept of scarcity and how it affects people across the globe - from sugar cane farmers in India to time-starved physicians in the United States.
Hidden Brain is hosted by Shankar Vedantam and produced by Maggie Penman, Jennifer Schmidt, Rhaina Cohen, and Renee Klahr. Our intern is Chloe Connelly and our supervising producer is Tara Boyle. You can follow us on Twitter @hiddenbrain, and listen for Hidden Brain stories each week on your local public radio station.

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The Scarcity Trap: Why We Keep Digging When We're Stuck In A Hole

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subscribe to Hidden Brain podcast Have you ever noticed that when something important is missing in your life, your brain can only seem to focus on that missing thing? Two researchers have dubbed this phenomenon scarcity, and they say it touches on many aspects of our lives.

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It turns out we are not nearly as rational as Homo Economicus is portrayed.

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Are we in control of our decisions? | Dan Ariely

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http://www.ted.com Behavioral economist Dan Ariely, the author of Predictably Irrational, uses classic visual illusions and his own counterintuitive (and sometimes shocking) research findings to show how we're not as rational as we think when we make decisions.

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Incentives anyone?

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Yi Tingyue has a lot going for her. She won a scholarship to China's prestigious Sichuan University, where she graduated with a master's in graphic design. She drives an Audi A4 and owns a penthouse apartment on the outskirts of provincial capital Chengdu. Vacations are spent touring Japan, Thailand and the U.S. Little wonder Yi is an 805.

That's the score assigned to Yi by Sesame Credit, which is run by Jack Ma's online-shopping empire Alibaba, placing the 22-year-old near the top of the scheme's roughly 500 million-strong user base. Sesame determines a credit-score ranking-from 350 to a theoretical 950-dependent on "a thousand variables across five data sets," according to the firm.

Unlike Western-style credit systems, Sesame takes in a broad range of behaviors both financial and social, all underwritten by an invisible web of Big Data. It's the most prominent in a rising network of social-credit-score systems in China that are dramatically expanding the concept of creditworthiness-and raising fears internationally about Orwellian overreach by an autocratic regime.

In China, cash has long been king. As recently as 2011, only 1 in 3 Chinese people had a bank account. The nation's rapid rise from collectivized penury to the world's No. 2 economy meant it never had the chance to develop Western-style credit histories. That meant people could default on loans,
or sell shoddy or counterfeit goods, with few repercussions. Society was dogged by a question: Whom can you trust?

In 2015, the government set about addressing this by allowing eight companies-including Sesame parent Ant Financial-to run trial commercial credit scores. The official guidance called for a nationwide system that would "allow the trustworthy to roam everywhere under heaven, while making it hard for the discredited to take a single step," to be in place by 2020.

Data, of course, is key. As Sesame had access to the records of Alibaba's mobile-payment app Alipay, which today boasts over 1 billion users worldwide, the company stole an easy march on its rivals in China. The system functions like a frequent-flyer scheme on steroids-one that transforms all of society into a first-class lounge. High scorers like Yi enjoy a bevy of perks. She can rent cars without a deposit, get better rates of foreign exchange and even skip hospital waiting lines. Rail stations have special waiting rooms for high Sesame scorers. For a time, high scorers could use a designated security queue at Beijing airport.

Yi keeps her score high in part by traditional brand loyalty: using Alipay wherever she goes and investing in the firm's savings fund. But Sesame's scheme doesn't merely encourage good behavior. Yi fears "unsociable" behavior might also impact her score; she says she "wouldn't dream" of parking a shareable bike in an undesignated place, for example.

The fear stems from the fact that as commercial credit systems like Sesame have started taking off in China, around half a dozen local authorities have launched pilot credit systems specifically designed to socially engineer behavior. These, too, ascribe a number to citizens. Good deeds gain points; bad deeds lose them, with perks and hardships attached. If you fall afoul of a pilot system, you cannot get a loan or mortgage, even if your offense is nonfinancial, like quarreling with neighbors. Conversely, nonfinancial "good deeds"-like giving blood-can cause your loan's interest rate to drop.

This overlapping mishmash of commercial and state-run systems has stoked fears that China's autocratic Communist Party is planning by 2020 to implement a single citizen score using opaque algorithms that's largely political. In a speech Oct. 4, U.S. Vice President Mike Pence described it as
"an Orwellian system premised on controlling virtually
every facet of human life."

In fact, China's social-credit scoring is best understood not as a single system but as an overarching ideology: encompassing punishments and rewards, to improve governance and stamp out disorder and fraud. Commercial schemes mostly handle the perks, state schemes the punishments. Both work in concert to encourage socially responsible behavior.

But they are undeniably intrusive. Government agencies compile and share data on judgments against individuals or companies. Fail to pay a fine or court-ordered compensation, or default on your debts, and you will be put on the "List of Untrustworthy Persons." Blacklisted individuals cannot make "luxury purchases," such as high-speed rail and air tickets or hotel rooms. Five million people have been barred from high-speed trains and 17 million from flights under the scheme, according to the official website. "The ripple effect on every part of your life becomes a multiplier on punishments," says professor Frank Pasquale, a Big Data expert at the University of Maryland.

And some elements are indeed worthy of dystopian fiction. In certain areas of China, call a blacklisted person on the phone and you will hear a siren and recorded message saying: "Warning, this person is on the blacklist. Be careful and urge them to repay their debts." When a blacklisted person crosses certain intersections in Beijing, facial-recognition technology projects their face and ID number on massive electronic billboards. Beijing-based lawyer Li Xiaolin was blacklisted after a court apology he gave was deemed "insincere." Unable to buy tickets, he was stranded 1,200 miles from home.
"It was ridiculous," he says.

Although it sounds draconian, the repercussions of blacklisting "tend to be coercive rather than punitive," China legal scholar Jeremy Daum says. Once you've complied with the court ruling, you're theoretically scrubbed from the blacklist (although many report that this is easier said than done). Essentially, the system utilizes technology to enforce existing legal prohibitions through shame and hardship rather than by adding a new layer of arbitrary regulation. Despite being blacklisted himself, Li is in favor of the system overall. "It's good for society," he says.

The fear, however, is that it will also be good for a Chinese government eager to quash free speech and root out dissenters. Under the state systems, "spreading rumors" is disproportionately penalized. In one region, neighborhoods have dedicated watchers to record deeds and misdeeds. As the state continues to persecute religious minorities like the Uighurs and silence outspoken academics, the worry is what metrics the social-credit systems may extend to next.

Still, for now people like Yi are happy to relish the newfound order that a social-credit score can bring-as well as enjoy the perks. "At first I worried about all my information being exposed," says Yi, sipping free Starbucks coffee courtesy of Sesame's loyalty points. "But then I thought, I'm just a normal kid, a regular person. What harm could there be?"

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How China Is Using Big Data to Create a Social Credit Score

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Yi Tingyue has a lot going for her. She won a scholarship to China's prestigious Sichuan University, where she graduated with a master's in graphic design. She drives an Audi A4 and owns a penthouse apartment on the outskirts of provincial capital Chengdu. Vacations are spent touring Japan, Thailand and the U.S.

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So picture this: You're a receptionist at, say, a hotel. Someone walks in and says they found a lost wallet but they're in a hurry. They hand it to you. What would you do?

And would that answer be different if it was empty or full of cash?

Those are questions researchers have been exploring; Thursday, they published their findings in the journal Science.

The experiment started small, with a research assistant in Finland turning in a few wallets with different amounts of money. He would walk up to the counter of a big public place, like a bank or a post office.

"Acting as a tourist, he mentioned that he found the wallet outside around the corner, and then he asked the employees to take care of it," says Alain Cohn from the University of Michigan, the study's lead author.

The researchers assumed that putting money in the wallet would make people less likely to return it, because the payoff would be bigger. A poll of 279 "top-performing academic economists" agreed.

But researchers saw the opposite.

"People were more likely to return a wallet when it contained a higher amount of money," Cohn says. "At first we almost couldn't believe it and told him to triple the amount of money in the wallet. But yet again we found the same puzzling finding."

The researchers decided to do the experiment on a much larger scale. They put together a team that dropped off more than 17,000 "lost" wallets in 40 countries over the course of more than two years.

All the wallets were about the same - a small clear case holding a few business cards, a grocery list in the local language, and a key. Some contained no money and some held the equivalent of about $13. Research assistants turned them in at the kinds of places people would typically bring a wallet they found on the ground - police stations, hotels, post offices and theaters.

Such a large operation came with a few headaches, Cohn says. One of the researchers was detained in Kenya for suspicious behavior. And researchers worried that a backpack full of wallets might raise eyebrows when crossing borders.

It's also worth noting that for logistical reasons, most of the wallets were not literally returned to the researchers. After people reported a wallet to its supposed owner over email, they were told that the owner had left town and didn't need the wallet anymore.

As results rolled in from around the world, the researchers kept finding the same result. In 38 out of 40 countries, people were more likely to report receiving wallets with money than those without. And in the other two, the decrease in reporting rates for the wallets with money were not statistically significant.

What if the wallets contained far more money? The researchers did a "big money" test in the U.S., the U.K. and Poland. In that phase of the experiment, the staff dropped wallets containing nearly $100, instead of $13.

Cohn says the results there were even more dramatic. "The highest reporting rate was found in the condition where the wallet included $100," he says. Forty-six percent of wallets with no money were reported, compared with 61% of those with about $13 and 72% of those with nearly $100.

What's behind all this honesty? The researchers suggest two explanations.

First, just basic altruism - the person who reports receiving a lost wallet might care about the feelings of the stranger who lost it.

There's some evidence for that. The same team ran a test where some wallets contained only a key - a thing valuable only to the person who lost it. Those wallets were about 10% more likely to be reported than those with no key.

Caring about strangers doesn't explain everything, though. The researchers think their findings also have a lot to do with how people see themselves - and most people don't want to see themselves as a thief. Cohn says they polled people who said that if there's cash in the wallet, it just feels more like stealing.

And, he says, "the more money wallet contains, the more people say that it would feel like stealing if they do not return the wallet."

Duke University economist Dan Ariely, who studies dishonesty, says this shows material benefits do not necessarily drive people's decisions about whether to be honest.

The study "shows in a very natural, experimental way our decisions about dishonesty are not about a rational cost-benefit analysis but about what we feel comfortable with from a social norm perspective and how much we can rationalize our decisions," Ariely says.

The rates at which people tried to return the wallets varied a lot by country, even though the presence of money in the wallet almost always increased the chances. In Denmark, for example, researchers saw more than 80% of wallets with money reported. Peru saw a little over 10%.

The researchers think wealth could be a factor, but there's a lot more research needed to explain the differences. "Now the problem is that we don't really know whether wealth affects honesty or it's the other way around" - whether honesty contributes to a country's relative wealth, says Cohn.

Countries with higher rates of primary education were also more likely to see high rates of lost wallets being reported.

"What this suggests is that what you learn in school is not just math and reading but also social skills, or just more generally how you treat each other," Cohn adds.

The study's results could help policymakers and businesses that want to figure out what motivates people to act for the good of others, rather than for their own enrichment.

"What our study suggests is that there might be a potential to promote honest behavior, first, by making the harm that your behavior can impose on other people more salient," Cohn says.

Cohn says the results also suggest that to promote honest behavior, businesses or policymakers should make it more difficult for people to deceive themselves that they're being honest when they are actually doing the opposite. For example, by having people sign a statement promising truthfulness before they report their car mileage, rather than after.

And sometimes, honesty does pay. Almost all of the people who reported a lost wallet got to keep the cash.

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What Dropping 17,000 Wallets Around The Globe Can Teach Us About Honesty

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So picture this: You're a receptionist at, say, a hotel. Someone walks in and says they found a lost wallet but they're in a hurry. They hand it to you. What would you do? And would that answer be different if it was empty or full of cash?

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What Can You Do With An Economics Degree?

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What Can You Do With An Economics Degree?

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What Can You Do With an Economics Degree?

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What Can You Do With an Economics Degree? Economics degrees are marketable credentials that often lead to financial analysis jobs, experts say. By Ilana Kowarski, Reporter March 4, 2019, at 11:23 a.m....

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Economics, a discipline and set of methodologies within the social sciences, can be described in a multitude of ways. The field focuses on the distribution, consumption, and production of wealth; one can also say that economists study human behavior and choice regarding buying and selling.

Economists use key concepts such as the law of supply and demand to predict how humans will interact with resources and, through these interactions, with one another. Such resources include money and capital, as expected, but also time, knowledge, property, and more. That there are so many resources in interaction within the market makes economics an exceedingly complex topic. The field is frequently broken down by the scale of study into the main categories of microeconomics and macroeconomics.

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What is Economics? | Intelligent Economist

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Economics, a discipline and set of methodologies within the social sciences, can be described in a multitude of ways. The field focuses on the distribution, consumption, and production of wealth; one can also say that economists study human behavior and choice regarding buying and selling.

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A sunk cost is a cost that has already been incurred; the money that has gone into a sunk cost is no longer accessible. Meanwhile, an opportunity cost refers to potential returns not gained due to not making a particular choice. So the difference between the two is between money that has actually been spent and money that would have been earned.

For example, if you invest in stocks, the money that you initially spent on those stocks is your sunk cost. And if you earn money from those stocks, the opportunity cost of the choice to invest is the money you would have earned if you'd invested in stocks from a different company.

Let's say you invested in a cosmetic company called Acme Beauty. You spent $5,000 on the initial stocks and made a profit of $2,000 after two years. But it turns out that if you had instead purchased $5,000 worth of stock from a company called Natural Beauty, you would have made a profit of $3,000 after two years. In both cases, your sunk cost would have been $5,000. But your opportunity cost in choosing Acme Beauty over Natural Beauty was the $1,000 you missed out on that you would have earned from the latter.

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Opportunity Cost | Intelligent Economist

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A sunk cost is a cost that has already been incurred; the money that has gone into a sunk cost is no longer accessible. Meanwhile, an opportunity cost refers to potential returns not gained due to not making a particular choice.

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In general, utility measures the satisfaction received through consumption of a good/service. While the total utility is all of the satisfaction derived from some amount of consumption of a good/service, marginal utility specifically describes the change in satisfaction (that is, the additional satisfaction) created through consumption of one extra unit of that good/service.

In the field of economics, marginal utility is applied by economists to gain an understanding of what quantity of a good or service consumers are likely to want to spend money on.

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Marginal Utility | Intelligent Economist

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In general, utility measures the satisfaction received through consumption of a good/service. While the total utility is all of the satisfaction derived from some amount of consumption of a good/service, marginal utility specifically describes the change in satisfaction (that is, the additional satisfaction) created through consumption of one extra unit of that good/service.

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As with most economic concepts, when decision-makers use marginal analysis as a tool, their ultimate goal is typically to ensure maximized profits. Marginal analysis is an enormously useful management strategy. Firms and manufacturers use marginal analysis to understand the cost and benefits of growing their businesses, e.g. with increased levels of production or by expanding to offer a broader range of goods and services. Before making such a decision, it is important to ensure that the benefit will outweigh the cost and will thereby contribute to greater profits, rather than resulting in financial drain. Businesses can likewise decide between two possible investment opportunities, figuring out which will provide greater benefits than their associated costs.

Economists apply marginal analysis in the sub-field of microeconomics. It can allow them to understand the way in which complex systems are influenced as a result of marginally altering their variables. This can answer the important question of how seemingly minor decisions and shifts create significant, notable ripple effects within businesses and markets.

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Marginal Analysis | Intelligent Economist

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As with most economic concepts, when decision-makers use marginal analysis as a tool, their ultimate goal is typically to ensure maximized profits. Marginal analysis is an enormously useful management strategy. Firms and manufacturers use marginal analysis to understand the cost and benefits of growing their businesses, e.g.

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APMac and APMic Unit 1 Lessons 1 and 2 - Ten Economic Principles and Five Economic Issues

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Start studying APMac and APMic Unit 1 Lessons 1 and 2 - Ten Economic Principles and Five Economic Issues. Learn vocabulary, terms, and more with flashcards, games, and other study tools.

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Define scarcity and economic resources.

Define how resource allocation is influenced by the economic system adopted by society.

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Individuals and societies are forced to make choices because most resources are scarce.

Resource allocation involves answering three basic questions: What goods and services to produce? How to produce those goods and services? And who consumes those goods and services?

Resource allocation is significantly influenced by the economic system adopted by society, such as command economy, market economy, or mixed economy. Each system involves a particular set of institutional arrangements and a coordinating mechanism for allocating scarce resources and distributing output.

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The production possibilities curve (PPC) model is used to demonstrate the full employment level of output and to illustrate changes in full employment.

Most resources are scarce, and in most cases the use of resources involves constraints and trade-offs.

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Economics...Understand the world around you (with Subtitles).

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Earlier this month, I went to the Winnipeg airport to fly home. One sign of a good vacation, for me at least, is that I'm so relaxed at the end that I forget to check carefully what time my flight leaves. I did that this year. For some reason, I had etched in my mind the idea that my flight from Winnipeg to Denver left at 4:30 p.m. So I took one last somewhat leisurely visit with my friend and mentor, Clancy Smith. At about 2:10 p.m., I left his house to stop at a drug store to find chocolate bars that I have trouble finding in the United States. I dropped off my car at the Winnipeg airport and got to the United kiosk just shy of 2:55 p.m. Lots of time, I thought.

Surprisingly, though, there was no one else ahead of me in the United line. When I went to the front of the line to check my suitcase, the United employee tried to do so on the computer but was stymied. He made a quick call in which he asked another United employee to unlock the baggage check. A few seconds later, he printed out a baggage tag. He explained that the U.S. customs and immigration people don't like people checking in when there is less an hour to go and I was checking in with 57 minutes to go. (When you fly out of Canada to the United States, you go through pre-clearance; when you go through U.S. customs and immigration, you are legally on U.S. soil and, indeed, once you're through, you see a sign saying "Welcome to the United States.")

"57 minutes to go," I thought. I had thought I had over an hour and a half. But it turns out that my flight was to leave at 3:55, not 4:30. When I got to Canada's equivalent of TSA, I told an employee that I had TSA-Pre, showing him that designation on my ticket. He laughed and said that that wasn't recognized there.

Not to worry. There were only 8 people in front of me. But 3 minutes later, there were 7 people in front of me. Canada's "TSA" was moving very slowly. I figured that once I got through, U.S. Customs would go quickly. (On this last, I was right.)

So I thought on the margin. There's a dishonorable way to get further up in the line and that is to ask someone near the front if you can go ahead of him or her. That way, you impose costs not just on him but also on everyone behind him who was previously ahead of you.

There's also an honorable way. That is to ask the person directly in front and ask if you can switch places with him. That way, the person who makes the decision is bearing the whole cost. I went with the honorable way. My plan was to do this with as many places I could before someone said no. I explained to the man in front that I had less than an hour before my flight left and asked him how much time he had before his flight. He said he had about 2 hours. So I asked him if he would switch. He looked kind of incredulous, as if my request were unfathomable. Then he said, "Forget it; you won't make your flight anyway." I answered, "I might or I might not, but if we switch, my odds improve a little." He agreed and let me switch. The person in front of him heard all this and, with a twinkle in his eye, let me switch. So did the person in front of him. So within 1 minute I had moved 3 spaces up. By that point, there were only 3 or 4 people in front of me. One was a flight attendant who wouldn't let me switch. Later I saw her on my flight; she was the only flight attendant on the flight and I could tell by the faltering way she read the directions from her cell phone that she was pretty new on the job. It made sense that she didn't want to risk being late.

Thinking on the margin can be pretty powerful.

Oh, and I made my flight. The boarding didn't start until about 10 minutes after I got to the gate.

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Earlier this month, I went to the Winnipeg airport to fly home. One sign of a good vacation, for me at least, is that I'm so relaxed at the end that I forget to check carefully what time my flight leaves. I did that this year.

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1. Do the first four principles (dealing with the individual) reflect reality? What principle would you add here about how individuals engage in the economic way of thinking?

2. What is the best way for individuals to interact to exchange goods and services with each other?

3. How can government help to make sure that individual interactions are done in the “best” way possible?

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Think we are rational? Maybe not. Listen to Alex Laskey explain a proven way to change behavior that is arguably irrational.

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Alex Laskey: How behavioral science can lower your energy bill

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What's a proven way to lower your energy costs? Would you believe: learning what your neighbor pays. Alex Laskey shows how a quirk of human behavior can make us all better, wiser energy users, with lower bills to prove it.

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Hernando de Soto on John Stossel - Property and Prosperity

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Resource Allocation and Economic Systems

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Resource Allocation and Economic Systems

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About this unit

In any economy, the existence of limited resources along with unlimited wants results in the need to make choices. In this unit, we introduce concepts of opportunity costs and trade-offs, and illustrate these concepts by using the production possibilities curve. We then consider how different types of economies determine which goods and services to produce, how to produce them, and to whom to distribute them. This unit also covers why and how specialization and exchange increase the total output of goods and services, with a discussion of absolute and comparative advantage. Finally, we touch on the importance of property rights, the role of incentives in the functioning of free markets, and the principle of marginal analysis.

AP® is a registered trademark of the College Board, which has not reviewed this resource.

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Basic Economic Concepts | AP®︎/College Microeconomics | Khan Academy

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In any economy, the existence of limited resources along with unlimited wants results in the need to make choices. In this unit, we introduce concepts of opportunity costs and trade-offs, and illustrate these concepts by using the production possibilities curve.