Chapter 2 Choice, Opportunity Costs and Specialization Economics, 7th Edition Boyes/Melvin.

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Chapter 2 Choice, Opportunity Costs and Specialization Economics, 7th Edition Boyes/Melvin

Copyright © Houghton Mifflin Company. All rights reserved. 2 | 2 Opportunity Cost Opportunity cost: the value of the highest-valued alternative that must be forgone when a choice is made. It is the evaluation of a trade-off. Marginal benefits and costs: the benefits and opportunity costs associated with one additional unit of the good.

Copyright © Houghton Mifflin Company. All rights reserved. 2 | 3 Opportunity Costs and Concerts You’ve just won a free ticket to see a Madonna concert. U2 is performing on the same night. Tickets to see U2 cost $75. On any given day, you would be willing to pay up to $100 to see U2. Based on this information, what is the opportunity cost of seeing Madonna? (a) $0, (b) $25, (c) $75, or (d) $100.

Copyright © Houghton Mifflin Company. All rights reserved. 2 | 4 Opportunity Costs The opportunity cost of seeing Madonna is the total value of everything you must sacrifice to attend her concert - namely, the value to you of attending the U2 concert. That value is $25 - the difference between the $100 that seeing his concert would be worth to you and the $75 you would have to pay for a ticket.

Copyright © Houghton Mifflin Company. All rights reserved. 2 | 5 Decision Making Principle: Decision making involves trade-offs. A trade-off means a sacrifice--giving up one good or activity in order to obtain some other good or activity.

Copyright © Houghton Mifflin Company. All rights reserved. 2 | 6 Production Possibilities Curve The production possibilities curve shows the maximum quantity of goods and services that can be produced when the existing resources are used fully and efficiently.

Copyright © Houghton Mifflin Company. All rights reserved. 2 | 7 Production Possibilities Underutilized (Inefficient) Nondefense Goods B1B1 F1F1 C1C1 D1D1 Only nondefense goods produced E1E1 Only defense goods produced A1A1 Efficient Combinations Defense Goods Impossible G1G DefenseNon-defense A1A B1B C1C D1D E1E F1F G1G

Copyright © Houghton Mifflin Company. All rights reserved. 2 | 8 Growth The PPC moves outward (growth occurs) as the result of: –Increased resources Larger labor force Change in labor force participation Chance in labor-leisure decision –Improved technology (innovation) –Expansion of capital stock –An improvement in the rules (laws, institutions, and policies) of the economy