OPPORTUNITY COSTS This section is all about how we make our decisions. All decisions involve a trade- offs. –Trade offs are all the alternatives we give up whenever we choose one course of action over another. –An Opportunity cost is the most desirable alternative given up as the result of a decision.

Individuals, businesses, and society practice trade offs everyday. Economists explains the trade-offs in society by choosing to devote its resources to consumer goods or military goods. –The alternatives are called Guns or Butter. Scarcity is the main factor in all choices. Why? –We have a limited amount of resources. –Question – What is the main reason students complain about having a quiz or test the next day after taking notes?

Because we have limited resources and sometimes a decision can be complicated or unclear a Decision Making Grid enables us to determine the best Opportunity Cost – the most desirable alternative given up as a result of a decision. Another component of making decisions is called “Thinking at The Margin.”

–Thinking at the Margin is deciding whether or not to add another unit. Restated thinking at the Margin means… How much more or less to do.

Example – –You have studied enough to make an 84 on your test. If you study one more hour you can make an 88. Will you study or go to bed? Why or why not? –You have studied enough to make a 68 on your test. If you study one more hour you can make a 72. Will you study or go to bed? Why or why not?

Summary – Businesses and government make more complex decisions every day but they use this method. –Hire or fire an employee? –Reduce the price of an item or pay to have it repackaged and shipped back to the manufacturer? –Manufacture military goods or consumer goods?

PRODUCTION POSSIBILITIES CURVE Production Possibilities Curves are graphs that help us to see how one value relates to another. –It shows alternative ways to use an economy’s productive resources. –The goal is to try to achieve the maximum production possible for use of available resources.

Example – You have 100 acres of land. You have the option of building an Ipod factory or growing corn. You can do either or both. –What combination would allow you to produce the most?

100 acres What are my options? Build a factory on fifty acres and grow fifty acres of corn. Build a larger factory on 100 acres and don’t grow any corn Use the 100 acres to grow just corn. You can employ some of the people to grow corn and hire others to work in the factory. You can hire all the laborers to work in the factory or you can hire all the laborers to work on the farm.

CORN IPODS PRODUCTION POSSIBILITY FRONTIER

SO WHAT’S THE POINT?

Trade – Offs – each point in a Production Possibility curve represents a trade-off. Land and labor are scare therefore using the factors of production to make one product means that there are less for the other. –The goal is Efficiency. – using resources in such a way as to maximize the production or output of goods and services. –Underutilization occurs when fewer resources are being used than the economy is capable of using.