How Is a Family Budget an Exercise in Managing Scarcity? What Role Does Income Play?

Scarcity Leads to Tradeoffs and Choice

When deficient resources are used, actors are forced to make choices that have an opportunity cost.

Learning Objectives

Requite examples of economic trade-offs.

Cardinal Takeaways

Fundamental Points

• Deficient resources diminish equally they are used and nearly all resources are scarce.
• In order to use a scarce resource, you are inherently using the resource for ane purpose and non an alternative.
• The cost of using a resource is chosen the opportunity cost: the value of the next all-time alternative that you could exist using the resource for instead.

Key Terms

• Scarce: Bereft to meet demand.
• Opportunity cost: The value of the best alternative forgone.

A fundamental concept in economics is that of scarcity. In dissimilarity to its vernacular usage, scarcity in economics connotes not that something is almost incommunicable to observe, but simply that it is not unlimited. For case, the number of available hours in a day is a scarce resource: there is a finite amount of time available to yous to do work, hang out with friends, and relax. Most resource are scarce in most situations.

Since resources tend to be scarce, anyone that uses the resource has to brand a decision about how to employ it. Suppose, for case, that you are a drink manufacturer. To produce a beverage, you have to employ some scarce resource: the plastic for the bottle, the workers' fourth dimension, a machine to fill the bottles, etc. If yous cull to make ane bottle of water, you take chosen to not make a bottle of soda. Your scarce resources force you to make a pick and a trade-off producing one product or another.

Tradeoffs: Since resource are scarce for a potable manufacturer, it must make a tradeoff between producing bottles of water and bottles of soda.

Like producers, consumers besides have to make choices. Frequently, consumers must choose between current consumption ("I want to buy an ice cream") and future consumption ("I should rather relieve my money so I can buy an ice cream tomorrow"). Since consumers' resource such every bit fourth dimension, attention, and coin are limited, they must choose how to all-time allocate them past making tradeoffs.

The concept of trade-offs due to scarcity is formalized past the concept of opportunity cost. The opportunity cost of a pick is the value of the all-time alternative forgone. In other words, if yous can just produce bottles of soda and water, the opportunity cost of producing a bottle of water is the value of producing a bottle of soda. Similarly, at that place is an opportunity price in everything: the opportunity toll of yous reading this is what you lot could exist doing with your time instead (say, watching a movie). When scarce resources are used (and only about everything is a deficient resource), people and firms are forced to brand choices that have an opportunity cost.

Individuals Confront Opportunity Costs

Individuals face opportunity costs when they cull one course of activeness over another.

Learning Objectives

Distinguish between explicit costs and opportunity costs

Key Takeaways

Key Points

• The opportunity price is the value of the next best alternative foregone.
• Every decision necessarily means giving up other options, which all have a value.
• The opportunity toll is the value one could accept derived from using the same resources another way, though this is not always easily quantifiable.

Fundamental Terms

• Opportunity Costs: The value of the all-time culling forgone, in a situation in which a choice needs to be fabricated between several mutually exclusive alternatives given limited resources.

When individuals make decisions, they are necessarily deciding between taking one course of action over another. In doing so, they are choosing both what to do and, by extension, what non to do. The value of the side by side best option forgone is chosen the opportunity toll. In other words, the opportunity cost of a course of action is the value the of the option that the individual chose not to accept.

Individuals face up opportunity costs in both economical and non-economic decisions. One of the easiest manner to imagine an individual's opportunity costs is to imagine a student who decides to report. By choosing to written report, the student is implicitly choosing to not become to a party, hang out with friends, or take hold of up on some much-needed slumber. In this case, the opportunity price is non easily expressed in dollars and cents, but is simply equally real.

Opportunity Toll: Past choosing to become to spend fourth dimension and money on things similar classes and computers, you are necessarily choosing not to spend information technology on something else, like going on vacation. This is an opportunity cost.

Rational individuals will endeavor to minimize their opportunity costs. By doing and then, individuals are maximizing the amount that they tin can get out of their resource (time, money, effort, etc.). This makes sense: individuals should seek to get the about and give up the least.

Every bit economic actors, individuals confront opportunity costs as well. For example, suppose yous decide to purchase a new estimator. You could accept called to spend your money on books or rent or a spring intermission trip; whichever 1 of those options is nearly valuable to yous (abreast purchasing a new computer) is the opportunity cost.

Such logic applies for every economic decision: purchasing ane good means that an individual has chosen to spend resources one manner instead of another. Opportunity costs are an important consideration for economists and business organisation people, only are faced past individuals fifty-fifty when they are not making classically economical decisions.

Individuals Make Decisions at the Margins

Individuals will choose the option that yields the greatest internet marginal benefit.

Learning Objectives

Employ the concepts of marginal analysis and utility to decision-making

Key Takeaways

Key Points

• The marginal cost or benefit is the amount that a decision volition change the total toll or benefit from where it is currently.
• Individuals will brand selection that maximizes the cyberspace marginal benefit (marginal do good – marginal cost).
• While total or boilerplate cost and benefit are of import, provided enough resource, individuals will wait only at the cyberspace marginal benefit.

Key Terms

• marginal benefit: The additional benefit from taking a course of activity.
• marginal cost: The additional cost from taking a course of activity.

When individuals make decisions, they practise so past looking at the boosted cost and benefit of the decision. The cost or do good of the single decision is called the marginal cost or the marginal benefit. This is dissimilar from the total or average: net marginal benefit (marginal benefit minus marginal cost) is the amount that total benefit will change due to the single decision. For case, if the cost of making ix pieces of pizza is $90 and the price of making x pieces is $110, the marginal cost of producing the tenth piece of pizza is $20. In theory, individuals will simply choose an option if marginal benefit exceeds marginal cost.

Marginal and Full Utility: Marginal utility is the corporeality that a certain action will change total utility. Individuals use internet marginal utility to make decisions.

Let's take an example. Suppose yous are buying a car and have three choices:

1. Machine A, which costs $10,000
2. Car B, which costs $12,000
3. Machine C, which costs $15,000

The prices represent the marginal costs of each automobile; purchasing the car volition add the toll of the car to your total costs. Also suppose Car A provides you $15,000 worth of utility, Car B provides $fifteen,000, and Car C provides $25,000. Those utilities, in dollar terms, are the marginal benefit of each car.

In order to make the decision, you look at the marginal cost and marginal benefit of each car. By subtracting the toll from the benefit, Car A offers $5,000 of marginal benefit, Car B offers $three,000, and Machine C offers $10,000. Obviously, Car C is the best choice considering, at the margins, it offers the most benefit to y'all.

Notation that you are concerned not with your total or average cost and do good (assuming no resource or other external restrictions), but with the marginal cost and benefit. As a decision maker, yous want to know how much the decision volition modify your electric current country, so you look at the margins, not the overall moving-picture show. That is non to say that things like the total cost are unimportant, but that, assuming there are enough resources, individuals volition look at the marginal change each option will provide to his/her life or to the firm and chose the ane with the greatest cyberspace marginal benefit.

Marginal Benefits and Costs for Pollution

The tools of marginal assay tin illustrate the marginal costs and the marginal benefits of reducing pollution. When the quantity of environmental protection is low (quantity [latex]Q_a[/latex]) and pollution is all-encompassing, at that place are cheap and easy ways to reduce pollution, and the marginal benefits of doing and then are quite loftier. At [latex]Q_a[/latex], it makes sense to allocate more resources to fight pollution.

However, as ecology protection increases, the inexpensive and easy ways of reducing pollution decrease, and pollution can only be reduced with costly methods. In other words, the largest marginal benefits are achieved offset, followed by decreasing marginal benefits. As the quantity of environmental protection increases to [latex]Q_b[/latex], the gap betwixt marginal benefits and marginal costs decreases. At point [latex]Q_c[/latex]_, the marginal costs will exceed the marginal benefits. At this level of environmental protection, society is non allocating resources efficiently, because too many resources are being given upwardly to reduce pollution.

Marginal Costs and Marginal Benefits of Environmental Protection: Reducing pollution is plush—resources must be sacrificed. The marginal costs of reducing pollution are more often than not increasing, because the to the lowest degree expensive and easiest reductions can be made start, leaving the more expensive methods for afterward. The marginal benefits of reducing pollution are by and large declining, considering the steps that provide the greatest benefit can be taken first, and steps that provide less benefit tin wait until later.

Individuals Answer to Incentives

Incentives are ways to encourage or discourage certain behaviors or choices.

Learning Objectives

Predict how pay incentives will influence a person's work operation

Cardinal Takeaways

Key Points

• Toll is one of the principal incentives studied in economics. Price incentivizes producers to supply a certain corporeality, and consumers to purchase a sure amount.
• Economic science is mainly concerned with studying remunerative incentives (those that concern material reward).
• Individuals, firms, and governments all modify incentives in hopes of encouraging desired outcomes.

Key Terms

• incentive: Something that motivates an individual to perform an action.
• Incentive Structure: The cumulative set of promised rewards and/or punishments that encourage actors to brand a set of decisions.

An incentive is something that motivates an private to perform an action. The study of incentive structures is central to the report of all economic activities (both in terms of individual decision-making and in terms of cooperation and competition within a larger institutional structure).

Mayhap the most notable incentive in economic science is cost. Price acts equally a point to suppliers to produce and to consumers to buy. For instance, a sale is nothing more than a store providing an incentive to potential customers to buy. The lowering of the price makes the purchase a better idea for some customers; the sale seeks to persuade individuals to alter their actions (namely, to buy the product).

Sales are Incentives: Sales are incentives for consumers to purchase, because firms know consumers generally respond to lower prices past purchasing more.

Similarly, the increase in price acts as an incentive to suppliers to produce more of a good. If suppliers think they tin can sell their products for more than, they volition be inclined to produce more. The price acts, therefore, as an incentive to customers to purchase and suppliers to produce.

Types of Incentives

Incentives come in many other forms, however. Broadly, nigh incentives can be grouped into ane of four categories:

• Remunerative incentives: The incentive comes in the class of some sort of material reward – specially money – in exchange for acting in a item way. Wages, prices, and bribery are all examples of remunerative incentives. This is the type of incentive that is typically associated with economics.
• Moral incentives: This occurs when a certain option is widely regarded as the correct thing to practise, or as peculiarly admirable, or where the failure to act in a certain way is condemned as indecent. Societies and cultures are ii main sources of moral incentives.
• Coercive incentives: The incentive is a promise of some sort of penalty if the wrong decision is made. For instance, the promise of imprisonment is a coercive incentive for people to not steal.
• Natural Incentives: Things such as curiosity, mental or concrete exercise, adoration, fear, anger, hurting, joy, the pursuit of truth, and a sense of control of people or oneself can cause individuals to brand certain decisions.

Economics is mainly concerned with remunerative incentives, though when discussing authorities regulations, coercive incentives often come up into play. By manipulating incentives, individuals (besides every bit businesses and governments) hope to encourage some behaviors and discourage others.

Incentives and Performance

Companies leverage incentives-based strategies to bulldoze operation and optimize employee controlling and behaviors through meaningful reward systems. While there are both advantages and drawbacks to this blazon of approach, remunerative (financial) incentives are highly attractive options for employers in a multifariousness of industries and businesses. Providing incentives such as variable income, where an individual tin obtain more personal rewards for successfully creating a product or making a sale, frequently drives up product for highly motivated employees.

An instance of this would be a manufacturing facility making widgets. The floor manager shifts the wage system from an hourly wage perspective to a directly piece charge per unit system. The more widgets a worker creates, the higher his or her prospective income will be. Under this incentive organisation less productive workers may stay the same, simply highly productive workers will reply by increasing their production.

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Source: https://courses.lumenlearning.com/boundless-economics/chapter/individual-decision-making/

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