Chapter 7 - Krugman_Econ_CH07_160-180 4:51 PM Page 160...

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>> N J UNE 6, 1944, A LLIED SOLDIERS stormed the beaches of Norman- dy, beginning the liberation of France from German rule. Long before the assault, however, Allied generals had to make a crucial decision: where would the soldiers land? They had to make what we call an “either–or” decision. Either the invasion force could cross the English Channel at its narrowest point, Calais—which was what the Germans expected— or it could try to surprise the Germans by landing farther west, in Normandy. Since men and landing craft were in limit- ed supply, the Allies could not do both. In fact they chose to rely on surprise. The German defenses in Normandy were too weak to stop the landings, and the Allies went on to liberate France and win the war. Thirty years earlier, at the beginning of World War I, German generals had to make a different kind of decision. They, too, planned to invade France, in this case via land, and had decided to mount that invasion through Belgium. The decision they had to make was not an “either–or” but a “how much” decision: how much of their army should be allocated to the invasion force, and Making Decisions A TALE OF TWO INVASIONS chapter 160 7 MGM/The Kobal Collection O What you will learn in this chapter: How economists model decision making by individuals and firms The importance of implicit as well as explicit costs in decision making The difference between account- ing profit and economic profit, and why economic profit is the correct basis for decisions The difference between “either–or” and “how much” decisions The principle of marginal analysis What sunk costs are and why they should be ignored How to make decisions in cases where time is a factor how much should be used to defend Germany’s border with France? The original plan, devised by General Alfred von Schlieffen, allocated most of the German army to the invasion force; on his deathbed, Schlieffen is supposed to have pleaded, “Keep the right wing [the invasion force] strong!” But his successor, General Helmuth von Moltke, weakened the plan: he reallocated some of the divisions that were supposed to race through Belgium to the defense. The weakened invasion force wasn’t strong enough: the defending French army stopped it 30 miles from Paris. Most military histori- ans believe that by allocating too few men to the attack, von Moltke cost Germany the war. So Allied generals made the right deci- sion in 1944; German generals made the wrong decision in 1914. The important Decision: Attack here? Or there? Krugman_Econ_CH07_160-180 9/2/04 4:51 PM Page 160
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Opportunity Cost and Decisions In Chapter 1 we introduced some core principles underlying economic decisions. We’ve just seen two of those principles at work in our tale of two invasions. The first is that resources are scarce —the invading Allies had a limited number of landing craft, and the invading Germans had a limited number of divisions. Because resources are scarce, the true cost of anything is its opportunity cost
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Chapter 7 - Krugman_Econ_CH07_160-180 4:51 PM Page 160...

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