ECON312N Principles of Economics
Week 1 Discussion
Trade Offs, Opportunity Cost, and Factors of Production
Read/review the following resources for this activity:
Textbook: Chapter 1, 3
Minimum of 1 scholarly source
The basic economic problem that every society faces is the fact that resources – often called the factors of production – are not sufficient enough to satisfy everything a society would like to have. Thomas Sowell, a renowned economist said, “The first lesson of economics is scarcity: there is never enough of anything to fully satisfy all those who want it.” (Sowell, 1993, p. 131). This statement implies that to get one thing we like, we usually have to give up another thing that we like.
Paul Samuelson, America’s first Nobel Prize winner for economics, is credited with providing the first clear explanation of the economic problem. He argued that in order to solve the problem of scarcity, societies must answer three basic questions:
What to produce?
How to produce it?
For whom it should be produced?
Firms produce goods and services, but what they produce and the quantity produced is largely determined by the needs and wants of consumers. Firms make decisions with respect to how goods and services are produced. In making these decisions, firms are faced with the decision on how to combine factors of production to produce goods and services. For example, one of the decisions firms are frequently confronted with is the decision as to whether to use labor-intensive or capital intensive methods of production. Finally, decisions on who will receive the goods or services produced will depend, to a large extent, on the distribution of income in the economy. Individuals with the highest incomes, for example, will have the ability to buy the most goods and services and, therefore, may have many goods and services produced for them.
Making decisions with respect to what, how, and for whom, requires that we trade–off one goal for another. Trade-offs are all the options we give up when we make a choice from competing alternatives. Opportunity cost, on the other hand, is the most valued alternative foregone or the next best alternative to any choice we make. It is important to note that the opportunity cost of a decision is the cost of the choice made in addition to the value or cost of the next best alternative foregone. Effective decision making requires a cost-benefit analysis – comparing the additional costs of alternatives with the additional benefits – of each of the alternatives we have to choose from.
Initial Post Instruction
For the initial post, address all of the following:
What important trade-offs have you made recently? What was the opportunity cost associated with the trade-off? To what extent did you integrate the concept of cost-benefit analysis in the decision-making process to arrive at the most cost-effective and efficient choice? In other words, based on the information at your disposal at the time of making the decision, what steps did you take to ensure that you were making the absolute best decision? (Use actual examples from your own experiences or construct hypothetical examples).
Assuming that you are a business owner faced with questions of What to Produce? How to Produce? and For Whom to Produce? what factors would you consider in answering these questions? (Use actual examples from your own experiences or construct hypothetical examples).