Trade-Offs and Opportunity Cost Chapter 1

Every economic decision involves trade-offs. Trade-offs are the alternative choices people face in making an economic decision.

Opportunity cost is the cost of the next best alternative choice Opportunity cost is the cost of the next best alternative choice. The opportunity cost is the money, time or resources a person gives up, for the final choice.

Question What is the opportunity cost of the War in Iraq?

Production Possibilities Frontier The Production Possibilities frontier diagram illustrates opportunity cost. It shows the combinations of goods and/ or services that can be produced when all productive resources are used.

The line of the graph represents the full potential (aka frontier) of economy employing all productive resources. Uses of the Production Possibilities Diagram: Identifying possible alternatives to putting the best resources into production

Idle resources lead to failure to reach full production potential. Economic growth (more resources, larger labor force, increased productivity) creates a new frontier.