DECISION MAKING AT THE MARGIN Thinking at the margin: deciding whether to do or use one additional unit of some resource What is the cost/benefit of studying one more hour/two more hours/three more hours, etc.? This is also known as cost/benefit analysis.

PRODUCTION POSSIBILITIES CURVE (PPC) a graph that shows all the possible combinations of producing two different goods /services in a particular period of time The line connecting the points on the PPC is called the production possibilities frontier

PPCs can tell us 3 types of important information: An economy’s efficiency Whether an economy has grown or shrunk The opportunity cost of decisions to produce more of one good/ service

EFFICIENCY An economy’s efficiency: using resources in such a way as to maximize the production of goods/services Any point on the line represents maximum efficiency Any point drawn inside (such as point X on the graph above) the line represents an underutilization (using fewer resources than the economy is capable of) of resources * Point Y on the graph above represents an impossibility because we don’t have that combination of resources.

GROWTH A PPC is a moment ‘frozen in time’ – in the real world resources are constantly increasing (shift of the PPF to the right) or decreasing (shift of the PPF to the left)

COSTS PPCs can show us what we give up by choosing one option over the other (remember, in economics cost is not money, but the alternative we give up when we choose) If we choose to use our limited resources to make more of one good our cost is making less of the other good Specific costs can easily be measured on a PPC