Economics: Unit I Productivity & Making Choices

Questions for focus [standards SSEF1 & 2] What does resource allocation mean? What is a trade-off? What is opportunity cost? How do people make rational decisions when confronted with scarcity? What is a cost-benefit analysis? (rational decision  benefits>/= costs) What is a production possibilities curve?

Resource allocation How people or governments determine who gets what US  $$$, China  government decides Traditional systems (Native tribes): trade (barter)

Trade-off Choices people must make when faced with scarcity

Opportunity cost The cost of the next-best alternative use of money, time or resources Vacation or car payments/insurance/upkeep? $1500 to spend

How do you make rational decisions when confronted with scarce resources? How do you decide how you spend your money? More satisfaction? Highest/best return? How would you spend $1000?

Cost-benefit analysis Comparing the cost of an action to the benefits Jeans vs. soccer cleats You have $300 to spend. You’re a soccer player and you need new cleats (your old cleats are worn out). You’re also a student, and you need new jeans for school (for the same reasons). What do you do? Reasons to buy the cleats: Reasons to buy the jeans: How can you get both? Is there some kind of compromise?

Rational decision making A rational decision is when the benefits outweigh or are equal to the costs. (This can be subjective!) Classic example: “guns” vs. “butter” Which is more important? Security/protection, or education/health care/roads/consumer products? Cost benefit analysis: can these issues be analyzed in terms of $?

Production possibilities curve (see pg. 23) Draw the production possibilities curve for guns & butter The curve is the maximum that can be produced

Term Review Resource allocation (scarcity) Trade-offs Opportunity cost Rational decision making Cost-benefit analysis Production possibility curve (frontier)