![]() The Law of Demand predicts an inverse or negative relationship between quantity demanded and the price of a good.Consumers react to changing price incentives by altering their consumption choices or the quantity demanded of goods.Higher (lower) prices require consumers to give up more (fewer) resources to obtain goods.Price acts as an incentive to consumers and producers. When opportunity costs change, incentives change, and people’s choices and behavior change.ĥ.Incentives can be either monetary or non-monetary.Incentives are the rewards or punishments that shape people’s choices. People can anticipate costs, but they occur only after a choice has been made.Ĥ. All costs relevant to decision making lie in the future.“Things” have no costs in and of themselves. Opportunity costs result from actions.Because people make choices, all opportunity costs have the following characteristics: Relate opportunity cost to the choices students made in the “The Magic of Markets” trading game.ģ.The opportunity cost of choosing an alternative is the value of the “next-best” foregone alternative. People (not governments, nations, or societies) choose.Ģ.Free trade increases worldwide material standards of living.ĭownload lesson full lesson guide for procedures and teaching tips.People voluntarily exchange goods and services because they expect to be better off after the exchange.This is true for trade among individuals or organizations within a nation, and among individuals or organizations in different nations. Voluntary exchange occurs only when all participating parties expect to gain. Acting as consumers, producers, workers, savers, investors, and citizens, people respond to incentives in order to allocate their scarce resources in ways that provide the highest possible returns to them.Incentives can be monetary or non-monetary.Changes in incentives cause people to change their behavior in predictable ways.Both positive and negative incentives affect people’s choices and behavior.People respond predictably to positive and negative incentives. Comparing the benefits and costs of different allocation methods in order to choose the method that is most appropriate for some specific problem can result in more effective allocations and a more effective overall allocation system.National economies vary in the extent to which they rely on government directives (central planning) and signals from private markets to allocate scarce goods, services, and productive resources.Scarcity requires the use of some distribution method, whether the method is selected explicitly or not.There are different ways to distribute goods and services (by prices, command, majority rule, contests, force, first-come-first-served, sharing equally, lottery, personal characteristics, and others), and there are advantages and disadvantages to each.No method of distributing goods and services can satisfy all wants.People acting individually or collectively through government must choose which methods to use to allocate different kinds of goods and services. To determine the optimal level of a public policy program, voters and government officials must compare the marginal benefits and marginal costs of providing a little more or a little less of the program’s services.ĭifferent methods can be used to allocate goods and services.As long as the marginal benefit of an activity exceeds the marginal cost, people are better off doing more of it when the marginal cost exceeds the marginal benefit, they are better off doing less of it.Marginal cost is the change in total cost resulting from an action. Marginal benefit is the change in total benefit resulting from an action.To determine the best level of consumption of a product, people must compare the additional benefits with the additional costs of consuming a little more or a little less.Few choices are all-or-nothing decisions they usually involve getting a little more or one thing by giving up a little of something else.Most choices involve doing a little more or a little less of something: few choices are “all or nothing” decisions. National Content Standards Addressed Standard 2: Marginal Decision MakingĮffective decision making requires comparing the additional costs of alternatives with the additional benefits. ![]() ![]() Marginal Benefit & Marginal Cost of Push-ups (marginal thinking and incentives).Rationing scarce items (rationing mechanisms).Auction for three pieces of paper (money price rationing).Download lesson guide above for activity instructions. This lesson uses examples, videos and three mini-activities to teach about opportunity cost and incentives.
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