Final answer:
Good economic decision-making includes comparing overall costs with overall benefits and focusing on marginal costs and benefits. Marginal analysis examines changes in benefits and costs with different consumption levels. The balance between market price and marginal cost informs the optimal production level for societal benefit.
Step-by-step explanation:
Good economic decision-making involves several key practices, two of which stand out:
- Comparing all of the benefits with all of the costs related to the production and enjoyment of a good is one foundational element. This involves a cost/benefit analysis, which is a method where you compare what you will sacrifice against what you will gain to help make a decision.
- Focusing primarily on marginal benefits and marginal costs of goods and services is also vital. Marginal analysis, or the examination of the benefits and costs of choosing a little more or a little less of a good, plays a central role in economics. It shifts the focus from total costs and total benefits to how these costs and benefits change with different levels of consumption or production.
Moreover, when the market price (P) is compared to the marginal cost (MC), we can infer whether the production of additional units of a good will be beneficial for society. If P > MC, society gains by producing more. If P < MC, it’s a sign that less should be produced. This balance, where P = MC, results in the greatest overall benefit to society.