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Identify the limited resource in a decision—money, time, attention, space, energy, or capacity—and name the competing wants that make it scarce. Distinguish scarcity from poverty or temporary shortage: scarcity exists whenever not everything wanted can be done at once.
Use what you learned in the previous lesson to solve real-world problems.
List which options are actually possible under a limit, then separate feasible choices from wishes that exceed the limit. Use simple everyday constraints, like hours in a day or dollars in a wallet, without yet trying to find the “best” choice.
Check what you understood with a short quiz.
State the tradeoff in a decision as “more of this means less of that.” Practice recognizing tradeoffs in personal choices, business choices, and public policy choices where one goal competes with another.
Find the one alternative that is really given up when a choice is made: the next-best option, not every possible option added together. Translate opportunity cost into the value of what the chooser would have gotten from that forgone alternative.
Separate cash costs from noncash sacrifices such as time, effort, risk, comfort, or lost flexibility. Reason through why a “free” ticket, favor, or app can still have an economic cost when it uses a scarce resource.
Read a production possibilities frontier as a picture of feasible combinations when resources are limited. Use points on, inside, and outside the frontier to recognize efficiency, unused resources, and impossible combinations.
Use a bowed-out frontier to see why producing more of one good can require giving up larger and larger amounts of another. Connect that shape to resources that are better suited to some tasks than others.
Predict how a reward, penalty, price, rule, or convenience change can make one option more attractive than another. Treat incentives as signals that change the costs or benefits people notice when choosing.
Recognize cases where an incentive changes behavior in an unwanted direction, such as rewarding speed but lowering quality. Ask what behavior is actually being rewarded, not just what the incentive designer hoped to encourage.
Compare the extra benefit and extra cost of doing one more unit, one more hour, or one more purchase. Make the decision at the margin rather than asking whether the whole activity is good or bad.
Tell when an average hides the information needed for the next choice. Practice replacing “What does this usually cost?” with “What will the next unit cost or benefit me?”
Notice when each additional unit brings less extra benefit or requires more extra effort than the previous one. Use examples like studying, eating, exercise, or production to reason through why the next unit may not feel like the first.
Sort past, unrecoverable costs from future costs and benefits that can still change. Use the sunk cost idea to reason through whether to keep waiting, keep spending, or walk away.
Review this chapter with practice based on your mistakes.
