Living Economics: Incentive Driven Trade-Offs

*The game referenced in this article is ‘The Tribez‘ offered by Game Insight UAB.

Consider the following situation:

You currently have one worker remaining. You can use that worker to produce either lumber or rocks

One Worker

Opportunity A: Lumber

Benefits (Pros):

  • Lumber available to produce Sun Tiles
  • With Sun Tiles, you can produce Furniture and sell it for a profit of 1400 Gold

Costs (Cons):

  • 1 Worker
  • 30 Minutes of Labor
  • 50 Wood
  • 50 Energy (Food)
  • If you use the worker for lumber, you cannot use the same worker for rocks. So you lose all benefits of Opportunity B.

Opportunity B: Rocks

Benefits (Pros):

  • Rocks available to produce Stones
  • With Rocks, you can purchase building materials to improve your home.

Costs (Cons):

  • 60 Gold
  • 1 Worker
  • 15 Minutes of Labor
  • If you use the worker for rocks, you cannot use the same worker for lumber. So you lose all benefits of Opportunity A.

Both Opportunity A and B have good results (Pros) and costs (Cons). The problem is something economists call a Trade-Off – a situation where choosing something means sacrificing something else in return. Trade-offs arise where limitations exist on what is possible; where (because of scarcity or some other restrictions) our choices have costs. Rarely, if ever is there a difficult or complex decision to be made that does not involve a trade-off in life. All decisions worth considering involve some cost – otherwise the solutions would be all too easy to identify.

Trade-Offs occur where choosing one option means sacrificing something in return. There is a cost to the choice.

In the example above, recall that this business has only one worker. They cannot magically create workers out of nothing, and the same worker cannot do two jobs at once. This company is now restricted and must make a choice. In economics, there is always a trade-off because all resources have multiple potential uses and only one can be done with any given resource at a time. The seller and buyer cannot both have the same $1 dollar bill. The worker can never use the exact same minute to both produce rocks and lumber. The trade-off one faces is the burden of the decision-making process.

In economics, there is always a trade-off.

In producing lumber, the first trade-off is one of raw materials for finished goods. In order to have the finished lumber, the company must sacrifice food, workers, and raw materials. In order to produce rocks the company must invest their money. There’s always a cost – the question is whether one of those opportunities is worth the cost.

From this question is the trade-off formula derived.

Pro – Con = Result

The Trade-off Formula

To determine whether a cost is worth paying, we utilize standard decision-making processes. We compare the Pros (benefits) and Cons (costs) and determine whether the Result is positive (worth paying the cost) or negative (not worth the cost).

The Pros and Cons can be tangible or intangible and are based on the Interests (selfish or social) of the decision-maker. The Pros and Cons are the incentives that motivate us to choose whether we select Opportunity A or Opportunity B.

Alternative example: You are offered two job opportunities:

A) They provide a company car and 30 days of paid vacation alongside all major holidays. $80,000 in salary. You must work nights and weekends.

B) They provide free lunch daily and 30 days of paid vacation. $75,000. You work days, and have nights and weekends off. You must work on New Years Day.

Which would you choose?

Pros:

  • Opportunity A -> Company Car, additional $5,000 in salary. All holidays off.
  • Opportunity B -> Free lunches, not working nights or weekends.

Cons:

  • Opportunity A -> Must pay for your own lunch. Work nights and weekends.
  • Opportunity B -> $5,000 salary less. No company car. Work New Years Day.

*Note the 30 days vacation is identical no matter what you choose and is thus insignificant in decision-making.

IncentiveThose things that motivate one to choose Option A.
ProsPositive incentives that motivate a person to select one opportunity. Rewards or benefits received from that choice.
ConNegative incentives that motivate a person to avoid an opportunity. Punishments or costs paid when that choice occurs.
Trade-OffWhere choosing one opportunity results in a sacrifice in return. Where there is a cost to the choice.

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