Managerial Economics For Dummies

Chapter 19

Ten Critical Concepts

In This Chapter

Remembering economic decision-making’s fundamental elements

Avoiding errors by knowing essential concepts

A great line from the movie Kung Fu Panda is “there’s no charge for awesomeness.” In this chapter, I cover ten of the most awesome economic concepts — and there’s no extra charge. Remembering these critical concepts when making economic decisions helps you avoid bad decisions. And what’s really awesome is that you have just ten of them to remember!

Opportunity Cost

Every economic decision incurs a cost. Reading this sentence means you’re giving up the opportunity to do something else — perhaps watch television. Decision-making is all about weighing alternatives, so it’s critical that you recognize the opportunity cost associated with your decisions.

Opportunity cost is the cost of a decision measured by the next best alternative given up. An important condition in this definition is the best alternative. You don’t have to evaluate every possible alternative; you simply need to think about the best alternative. As you make managerial decisions, you need to compare the decision you’re making to its best alternative. For example, ...