Economics is the study of choice in using scarce resources that have alternative uses. As economist Thomas Sowell observed, “there are no solutions [to economic problems], only trade-offs.” Good economic thinking seeks to understand these trade-offs so we can create the greatest value for ourselves and others.
In economics, scarcity means using a resource in one way prevents you from using it in another. For example, the choice to use gold to make jewelry means that same gold cannot be used to make electronic components, coins or dental crowns. The highest-valued alternative not chosen is the opportunity cost of that gold.
All economic decisions involve costs and benefits, but not all involve money. Choosing a financial investment involves money. Choosing what to listen to during your commute does not. Both have an opportunity cost. Because we want to employ resources – including people and their time – in the most valued way, opportunity cost must always be considered.
Marginal analysis is an important element in good economic thinking that can greatly improve business decisions. Marginal analysis considers the benefits and costs associated with a specific change. Mistakes to be avoided include inappropriately considering unrecoverable costs (sunk costs) or using totals and averages which hide or subsidize unprofitable assets or activities.
In keeping with our Vision, we strive to create mutual benefit by delivering products and services customers prefer to their alternatives, as well as profitability for Koch. The magnitude and risks of a decision should determine how much to invest in analysis, including the range of outcomes to consider.
Good economic thinking and, thereby, good decision making requires accurate measures of scarcity and relative value. Thus, for a society to be prosperous and progress, it must generate measures of what people value and the availability of resources to satisfy those values. Such measures can only arise from voluntary exchanges in the form of relative prices.
The same is true for an organization, which is why we base our decisions on measures derived from economically sound prices set by these conditions.
All decisions, large and small, benefit from challenge and good economic and critical thinking. Thousands of employees making better decisions every day provide a major competitive advantage and can be the difference between success and failure.