Intro to Economics Part II: Decision Making

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Presentation transcript:

Intro to Economics Part II: Decision Making Mr. Edwards SAHS

Economics asks three basic questions: Economic Questions Economics asks three basic questions: What is produced? How is it produced? For whom is it produced?

How do we make choices? Individuals, families, and nations all play a part in answering economic questions.

How do we make choices? Decisions are made by looking at marginal cost and marginal benefit Marginal cost: the total cost of adding one unit of production Marginal benefit: the benefit gained from adding one unit of production

Marginal Cost Least amount that any product/decision is worth You have two hours. You spend the first hour watching TV, but you need to study. Marginal cost is the time given up studying to watch TV.

Marginal Benefit Satisfaction or benefit gained from any economic decision. If you watch TV instead of studying, the marginal benefit is the enjoyment you get from watching TV.

Decision Making When making a decision, marginal benefit should outweigh marginal cost for the decision maker.

Trade-Offs Decisions an individual must make to deal with scarcity You have $50. If you buy a $50 pair of jeans, you have no money left for groceries.

Opportunity Cost The total cost of the next best choice when making a decision. By buying the jeans, the opportunity to buy groceries is no longer there.

There once was a student who really liked cookies There once was a student who really liked cookies. During lunch, the cafeteria ran out of cookies and the student was dejected. She went to her next class, during which she somehow found out the cafeteria had more cookies. The student told her teacher she was going to the cafeteria to get a cookie, to which the teacher replied, “No you’re not.” The teacher told her that if she left the class to go get a cookie, she would be written up. She took a moment to ponder the situation and promptly left to get some cookies.

Production Possibilities Curve The PPC is a way of visually representing opportunity cost and trade-offs. It shows what can be produced with available resources

Production Possibilities Curve Points A, B, &C show full use of resources Point X fails to use all resources Point Y is unattainable Product 2 Product 1

Production Possibilities Curve If we decide to increase product 1 from point C to point B, the opportunity cost of product 2 is the space between M & N. Product 2 Product 1 N M