Hiuhiu

Only available on StudyMode
  • Download(s) : 72
  • Published : February 20, 2013
Open Document
Text Preview
3/17/05

5:55 PM

chapter

500_12489_CH07_170-191

7

Page 170

>> Making

Decisions

A T A L E O F T W O I N VA S I O N S

O

6, 1944, ALLIED SOLDIERS

much should be used to defend Germany’s

stormed the beaches of Norman-

border with France? The original plan,

dy, beginning the liberation of

devised by General Alfred von Schlieffen,

France from German rule. Long before the

allocated most of the German army to the

assault, however, Allied generals had to

invasion force; on his deathbed, Schlieffen is

make a crucial decision: where would the

supposed to have pleaded, “Keep the right

soldiers land?

wing [the invasion force] strong!” But his

N JUNE

How economists model decision
making by individuals and firms



The importance of implicit as
well as explicit costs in decision
making







The difference between accounting profit and economic profit, and why economic profit is the
correct basis for decisions
The difference between
“either–or” and “how much”
decisions
The principle of marginal
analysis

“either–or” decision. Either the invasion

weakened the plan: he reallocated some of

force could cross the English Channel at its

the divisions that were supposed to race
through Belgium to the defence. The weak-

the Germans expected—or it could try to

ened invasion force wasn’t strong enough:

surprise the Germans by
landing farther west, in
Normandy. Since men and
landing craft were in limited supply, the Allies could
not do both. In fact, they
chose to rely on surprise.
The German defences in
Normandy were too weak to
stop the landings, and the

MGM/The Kobal Collection



successor, General Helmuth von Moltke,

narrowest point, Calais—which was what

What you will learn in
this chapter:

They had to make what we call an

Allies went on to liberate
France and win the war.
Thirty years earlier, at the
beginning of World War I,
Decision: Attack here? Or there?



What sunk costs are and why
they should be ignored

German generals had to

make a different kind of decision. They, too,

the defending French army stopped it 30

How to make decisions in cases
where time is a factor

planned to invade France, in this case via

miles from Paris. Most military historians

land, and had decided to mount that invasion

believe that by allocating too few men to the

through Belgium. The decision they had to



attack, von Moltke cost Germany the war.

make was not an either–or but a “how much”
decision: how much of their army should be

170

So Allied generals made the right decision in 1944; German generals made the

allocated to the invasion force, and how

wrong decision in 1914. The important

500_12489_CH07_170-191

3/17/05

5:55 PM

Page 171

point for this chapter is that in both cases

at the significance of opportunity cost for

the generals had to apply the same logic

economic decisions and the role it plays in

that applies to economic decisions, like

“either–or” decisions. Next we turn to the

production decisions by businesses and

problem of making “how much” decisions

consumption decisions by households.

and the usefulness of marginal analysis. We

In this chapter we will survey the princi-

then examine what kind of costs should be

ples involved in making economic deci-

ignored in making a decision—costs which

sions. These principles will help us under-

economists call sunk costs. We end by con-

stand how any individual—whether a con-

sidering the concept of present value and its

sumer or a producer—makes an economic

importance for making decisions when

decision. We begin by taking a deeper look

costs and benefits arrive at different times.

Opportunity Cost And Decisions
In Chapter 1 we introduced some core principles underlying economic decisions. We’ve just seen two of those...
tracking img