Economic Decision Making

1-What three steps must one take to be a good decision maker? 1-Identify the problem 2-Analyze the alternatives 3-Make your choice so that you carefully consider the costs and benefits of each possibility

2-What is the MAIN idea on page 20? Economic choices involve trade-offs and the careful evaluation of opportunity costs.

3-What is a “trade-off”? Alternative choices When you give up one thing to get something else. We can’t have it all Economists are interested in how people respond to trade-offs.

4-What is an “opportunity cost”? The cost of the next-best alternative Provide an example. When Jesse decided to purchase the jersey, his opportunity cost was the MP3 player [the next best choice he gave up.]

Opportunity Cost We face a scarcity of time and money all the time We “spend” that time and don’t perceive it as a cost - but it is, as much as money spent is a cost But time is a scarce (desired/limited) resource, it has a value just like money and it operates the same way - once it’s “spent”, it’s “spent”

Opportunity Cost Trade-off Choosing to use a scarce good [time, money] for one thing and giving up the next best alternative. What you give up is the “opportunity cost” It is what you have lost in giving up the next best alternative. If you study for one hour, you are giving something else up [reading, texting, going out to a movie…] The opportunity cost of studying is going out to a movie…. Time, as well as goods and services, is also scarce.

Opportunity Cost Examples 1-If you study for one hour, you are giving something else up [going out to a movie] The opportunity cost of studying is going out to a movie…. 2-You only have $50.00 and you spend it on a concert ticket, instead of spending it on dinner at a favorite restaurant. The opportunity cost of the ticket is going out to your favorite restaurant.

What are the opportunity costs of the following scenarios? [What was the next best alternative or trade-off?] 1-Watching television tonight. 2-Going to bed early. 3-Playing a high school sport. 4-Having an after-school job. 5-Going to college after you graduate from high school. 6-Going to work, instead of college, after you graduate.

Opportunity Cost Think of something you did recently. What was the opportunity cost of that action? Write it down It has to be something that you would actually do; it must be a realistic description of your loss.

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5-What is the MAIN idea on page 21? Economies face trade-offs when deciding what goods and services to produce.

“You Don’t Have to Spend a Buck to have a Cost” Read the four paragraphs and: 1-Underline everything you already know about opportunity costs 2-Write “quotation marks” for terms and phrases you do not for what you don’t know or understand”

Define: Explicit Costs Implicit Costs

Explicit Costs: out of pocket expenses/money spent. Movie: price of ticket, snacks, gas to drive there if distant location. Implicit Costs: The value of resources that could have been used elsewhere. Movie: pay earned if I had worked instead [opportunity cost]

“Practice with Opportunity Cost Analysis” In each of the 6 scenarios, there is a perceived opportunity cost. Given you knowledge of opportunity costs, explain each of the 6 scenarios. Is the opportunity cost in each scenario high or low?

6-What is the purpose of a “production possibilities curve”? To illustrate opportunity costs, economists use the PPC which is a diagram representing various goods and services an economy can produce when all of its resources [CELL] are in use.

1.6 What does point a represent? A combination of 70 cars and 300 units of clothing

What do points a, b, and c represent? Maximum combinations of output that are possible if all resources are fully employed

. 1.6 What does point d represent? Being outside the curve means there are no extra resources available to produce more clothing [cars yes]

1.6 What does point e represent? Idle resources such as factories, land, labor strike. As long as some resources are idle, the country cannot produces along the frontier and is not realizing its full production potential

. 1.8 Explain what may have caused the curve to shift outward to point d. Changes that cause the PPF to expand: population growth, improvements in technology

8-What is the purpose of an “economic model”? A simplified equation, graph or figure showing how something in the economy works: PPC, Circular Flow Model

9-What is “cost-benefit analysis”? The way most economic decisions can be evaluated. It is a way of comparing the costs of an action to the benefits received.

10-What is a “free enterprise economy”? Where consumers and privately owned businesses, rather than the government, make the majority of economic decisions [What, How and For Whom?]

11-Explain the term: “standard of living”. The quality of life based on the ownership of the necessities and luxuries that make life easier.