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Consider the statement that follows: "... Economics is the study of how humans make decisions in...

Consider the statement that follows: "... Economics is the study of how humans make decisions in the face of scarcity. These can be individual decisions, family decisions, business decisions or societal decisions. If you look around carefully, you will see that scarcity is a fact of life. Scarcity means that human wants for goods, services and resources exceed what is available..."

How could you use this statement to explain why two people who make the same amount of money, but one of them chooses to own a big house and drive a small car and the other chooses to drive a big car and live in a small house?

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Answer #1

The statement defines how human beings make decisions when resources are scarce and wants are unlimited. Hence, when two people have same amount of money but their allocation of goods and services are different between a car and a house based on their opportunity cost which is the amount forgone in order to get something which differ from person to person. For example, some might prefer a smaller car compared to a big car but a bigger house instead of a smaller one.

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