Tuesday, April 7, 2015

The Cost-Benefit Analysis

When it comes to economics, the basic problem and the key to understanding all comes down to scarcity and decision making.  In economics, scarcity refers to limited resources such as land, labor, and capital (Investopedia, 2003).  When resources are scarce, people must make choices based upon the resources they have to satisfy their wants.  Since there is a scarce amount of resources that are available, consumers, businesses, and governments have to make choices about where to apply the scarce resources.  This could mean giving up something for the sake of using the resources elsewhere (Riley, 2011).  The whole idea of weighing the resources that are available against the needs and wants of a company, consumer, or government is called the cost-benefit analysis.  The cost-benefit analysis is an approach in which businesses weigh decisions.  In this approach, all of the benefits are put on one side of the balance and all of the costs are put on the other, whichever side weighs more wins (The Economist, 2009).  Scarcity and decision making is a key point to understanding the economic principle, therefore, it is important that students are taught this important concept which drives our economic society.  Teaching the cost-benefit analysis in the classroom would be fairly easy.  The students could be given a limited number of tangible items and a list of things that could be built with those items ranked from most important to least important.  They could weigh the benefit of allocating those resources to build only one of the important items or several of them.  Another option is to give students a certain amount of money and the prices of groceries and a video game that they want.  Have the students weight the benefit of buying the video game over the groceries and vice versa.         

The Economist - Cost-benefit analysis. (2009, September 15). Retrieved April 7, 2015, from http://www.economist.com/node/14298838.

Riley, G. (2011, September 13). Study Note - The Basic Economic Problem: Scarcity and Choice. Retrieved April 7, 2015, from http://beta.tutor2u.net/economics/blog/study-note-the-basic-economic-problem-scarcity-and-choice.

Scarcity Definition | Investopedia. (2003, November 25). Retrieved April 7, 2015, from http://www.investopedia.com/terms/s/scarcity.asp.

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