Economic Choices and Decision Making 1.3

Introduction Because resources are scarce, businesses and consumers need to make wise choices. Trade-offs are the alternative choices people face in making an economic decision. Thinking on the margin, or MARGINAL ANALYSIS, involves making decisions based on additional benefit vs. additional cost

Would you see the movie three times? Thinking at the Margin # Times Watching Movie Benefit Cost 1st $30 $10 2nd $15 3rd $5 Total $50 Would you see the movie three times? Notice that the total benefit is more than the total cost but you would NOT watch the movie the 3rd time.

Trade-Offs and Opportunity Cost Opportunity cost is the cost of the next best alternative among choices. The opportunity cost is the money, time, or resources a person gives up to make his final choice.

Trade-Offs and Opportunity Cost Opportunity costs are experienced when trade-offs are made.

Production Possibilities The Production Possibilities Frontier is a graph that shows the various combinations that can be produced when all resources are used. In short, it shows us the opportunity costs of producing each product.

Production Possibilities

Production Possibilities Frontier ?

Production Possibilities Frontier

Production Possibilities Frontier

Production Possibilities Frontier The line on the graph represents the full potential (the frontier) - when the economy employs all of their productive resources.

Production Possibilities Frontier Economic growth is needed for “C” more resources a larger labor force increased productivity

Production Possibilities Frontier An economy pays a high cost if any of its’ resources are idle: It cannot produce on its frontier and it will fail to reach its full production potential.

Thinking Like an Economist Building simple models like the PPF helps economists analyze or describe actual economic situations. Cost-benefit analysis helps economists evaluate alternatives by looking at each choice’s cost and benefit.

The Road Ahead how the economy works on a daily basis. Studying economics will help us know It helps us understand a free enterprise economy, where people and privately owned businesses rather than the government make the majority of the economic decisions.

The study of economics helps us The Road Ahead The study of economics helps us to become better decision makers understand the free-enterprise system make wise voting decisions