HGov: Economic Decision Making


Because individual decisions directly affect the economy, it is important that we understand the nature of our choices. One basic constraint on our production and consumption choices is a scarcity of resources. In order to produce anything we need resources or factors of production. Unfortunately the quantity of available resources is limited. We cannot produce everything we want in the quantities we desire. This fact forces us to make difficult choices.

Every choice involves tradeoffs among alternatives. When making a decision, people generally try to maximize the utility, or satisfaction, they hope to gain by choosing one alternative over another. The opportunity cost of any decision is the value of the next best alternative.

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Economists use an economic model known as the production possibilities frontier to measure what we gain and lose when deciding how to use the factors f production in different ways. The model shows the tradeoffs and opportunity costs involved in producing more of one good at the expense of another. It also reminds us that even when an economy is working at peak efficiency, it won’t be able to produce everything that we might want.

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