Unit 6 Objective 7.02 Trade offs and Opportunity Costs. I: Trade-Offs A: If a resource is used to produce one good, that same resource cannot be used to produce something else. B: Trade Off- the process of giving up one desire to satisfy another desire Ex: money vs. give girlfriend a present Ex: 2 more hours of sleep vs. studying for test.

II: Opportunity Costs Type of trade-off A: Opportunity Cost – value of what is given up in a trade-off. Ex: Dating –cost of not dating some other person Ex; College vs. working-cost is $ of college and the amount of $ gained from working. Remember: “An opportunity cost is an opportunity lost.” B: Immediate gratification – when you give up something in the long-term to satisfy an immediate want.

III: Revenue A: Revenue- the total amount of money earned B: Total Revenue: number of units sold multiplied by the average price per unit. C: Marginal Revenue: Total change in revenue that results from selling one more unit of output –100 pizzas X $10.00 =$ –One more pizza sold = $10.00 $ $10.00 = $ Marginal revenue = $10.00

IV: Marginal Cost A: To predict the revenue that will come from the goods you produce, you must balance costs and benefits. B: After figuring out production, you must figure out marginal cost-the price of producing one additional unit. –Ex: it takes $20.00 to produce 10 toy cars. What is the marginal cost of producing one more car? $20/10 cars = $2.00 per car

V: Marginal Benefits A: Benefits of each item produced usually goes down with each item produced. Marginal Benefits-additional benefit of each additional unit produced. –Ex: the first 10 toy cars sell for $30.00 –The next 10 cars sell for an additional $ toy cars sell from $45.00 After the first 10 toy cars, what is the marginal benefit for each toy car produced? First 10- $30/10 = $3.00 Next 10-$15/10 =$1.50

VI: Cost –Benefit Analysis A: Choosing an action when benefits are greater than costs. B: However at some point cost may exceed benefit. Diminishing marginal benefit- the marginal benefit of each unit of a good produced declines as each additional unit is produced. –Ex: A developer wants to build houses on 100 acres of land near a lake. Houses with a lake view cost the most Value of the land decreases further away from the lake Declining marginal benefit with each house built beyond a certain point.

Class work Read pp What is a fixed cost? What is a variable cost? What two factors are taken into account in a cost-benefit analysis? Define diminishing marginal benefit. Why does marginal benefit diminish with increases in quantity?