Understanding what the market system does well and what it does badly is essential for developing solutions to the fundamental economic problem: how to best manage the resources of society despite their scarcity. As a result, all economic decisions involve tradeoffs. A well-functioning market system facilitates such decisions by assigning an input to where it will best serve society. The supply and demand model show how a competitive market behaves. This model is the most basic tool used by economists to measure and illustrate how the interactions in a market system determine price and quantity.

First, briefly explain the reason(s) why the true cost of any decision is its opportunity cost;

Next, list the three decisions every household or firm must make in deciding how to allocate its scarce resources and briefly explain the exchange in which of the possible combinations of outputs to producer is carried out as well as the system in which it is decided how much of the total output of each output to distribute to each person;

Lastly, briefly explain an optimal decision you recently made. In doing so, be certain your answer includes an explanation of the reason(s) it best served your objectives and how you allocated resources in your decision-making process.