Economic Choices and Decision Making 1.3

ADAM SMITH "It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own self-interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages."

Adam Smith (again) Every individual “intends only his own gain, and he is in this… led by an invisible hand… By pursuing his own interest he frequently promotes that of society…” Competition acts as an “invisible hand” that guides resources to their most productive uses. A truly competitive market – operating with a minimum of government intervention – would bring about the greatest good for society as a whole. Explain this idea of an invisible hand. Why did Smith’s ideas appeal to business owners?

A picture of the Invisible Hand

Become a Good Decision Maker Trade-offs: alternative choices made in an economic decision Opportunity Cost: the cost of the next best alternative use of money, time, and resources when one choice is made rather than another. More in-depth: tunitycost.swf tunitycost.swf Scenario: You have a general $100 gift certificate for the mall. How are you going to spend it? With a partner, make a grid of the criteria that will go into your decision…

Criteria Alterna tives costdurabili ty utilityEtc. Shoes CD’s Etc. Example Trade-Off Grid

Opportunity cost—After school What did you do yesterday after school? Look at the opportunity costs of your decisions. Also, explain how your decision will or will not affect your friends and members of your family.

You decide that you are going out to eat tonight with others. What factors go into: –Where you’re going to eat? –Who you are going with? –What you’re going to eat? –How you’re going to pay for it? What are your opportunity costs of making your ultimate choice over the next best options?

Production Possibilities Production Possibilities frontier – a diagram representing various combinations of goods and/or services an economy can produce when all productive resources are fully employed. What is the opportunity cost of scoring a 75% on the calculus test?

The most famous PPF example MILITARYV. CIVILIAN

A Two-Product Farmer’s Possible PPF

Why is the yellow area inefficient production? Why is the white area unattainable production? What would have to happened to move into the white area?

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Different countries: labor v. capital

Cost of War in Iraq From nationalpriorities.org > $600 billion (Feb 2009) Possible Opportunity Costs: >90 million kids attending head start programs >193 million people w/ health care for 1 year >10.7 million additional teachers for 1 year >5.1 million additional housing units >101 million full 1 year university scholarships

The “Cost of War in Iraq” slide is an example of what kind of PPF?

1 opinion1 opinion

Cost-Benefit Analysis A way of thinking about a problem that compares the costs of an action to the benefits received