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Making Economic Decisions

75 min

Guiding Questions:

  • What is scarcity?
  • What are opportunity costs?
  • How do these things factor into making economic decisions?


  • Students will describe and give examples of scarcity.
  • Students will describe and give examples of opportunity costs.

  • Scarcity
  • opportunity cost
  • resources
  • wants


Have students read as homework prior or at the beginning of class the essay on Making Economic Decisions.

Project, write, or post the following statement in front of the class:

The universal economic problem is that resources are scarce and human wants are unlimited.

Explain to students that this simple sentence is the basis for all economic thought. But, first, we need to take a look at what economists mean by “resources” and “scarce.”

Pose the following questions to the class.

What are resources? What are some examples of resources?

  • (Teacher’s notes: To economists, resources are all natural, human, and manufactured inputs that are used to create goods and services. This includes “land” (all natural resources), “labor” (all forms of human work), “capital” (physical, man-made goods used in the production of other goods), and “entrepreneurship” (the human creativity, innovation, and initiative necessary to combine land, labor, and capital).

What do we mean by scarce? What are some examples of scarcity?

  • (Teacher’s notes: To economists, for a resource to be scarce, it must meet three criteria: The supply of the resource is limited; the resource is desirable; there is an alternative use for the resource. Thus, for example, clean, drinkable water is scarce because it is both limited ad desirable. Polluted, salt water is not scarce, because it is not desirable.)

What do we mean by wants? To what extent do you believe they are truly unlimited?

  • (Teacher’s notes: To economists, wants are the desires of humans to acquire the goods or services that are necessities (food, water, shelter) or that provide pleasure or satisfaction. Economists state that these wants are never completely satisfied, so they are unlimited.)

Next, tell students that they are now going to brainstorm what individuals and societies do to attempt to solve the economic problem. Break students into groups of four or five (depending on class size) and pass out Handout A: The Economic Problem. Ask the groups to work together to answer the questions on the handout and to be prepared to answer them in front of the class in fifteen to twenty minutes. When complete, the instructor should choose groups to report and answer each of the questions.

Ask students: In what ways do modern societies solve the “economic problem”?

Post the following on the board: TANSTAAFL (For fun, you might pronounce it phonetically – Tahn-stah-fel to throw students further off of the track.) Ask students what they think it means.

Work out with students that it is an abbreviation for “There Ain’t No Such Thing As A Free Lunch”.

Tell them that this phrase was, although he did not originally coin it, the title of a book by Nobel Prize winning economist, Milton Friedman.

Brainstorm with the class what the author meant.

  • Was he only talking about lunch?
  • What did he mean by the phrase?
  • Can a lunch never be “free”? Why/why not?
  • What does this statement mean about the larger subjects of costs and benefits?

Explain to the class that a central tenet in economics is that every action has a cost. Economists understand cost to include more than money costs of making a choice (“explicit costs”), but also the costs of what one must give up (“implicit costs”). The most important and irretrievable of these costs is time.

Pass out Handout B: Opportunity Costs. Have students work in small groups to answer the questions regarding opportunity costs. When complete, go over students’ answers and discuss.

Go back to the mnemonic TANSTAAFL. Ask students again what it stands for. Ask them how it applies to the opportunity costs of the last activity and/or any other economic decisions they can think of.

Assign students come up with an economic decision that is relevant to their lives, similar to the one in the activity with Handout B.  Have them go through the opportunity costs and list everything as they did in the activity.  They will discuss in the next class and/or turn it in.

Teach the lesson, Prices and Values.

Student Handouts

Next Lesson

Prices and Value