1. Chapter 1: Section 2 Vocabulary

2. Key Terms
trade-off: the alternatives that we give up when we choose one course of action over another
“guns or butter”: a phrase expressing the idea that a country that decides to produce more military goods (“guns”) has fewer resources to produce consumer goods (“butter”) and vice versa
opportunity cost: the most desirable alternative given up as the result of a decision

3. Key Terms, cont.
thinking at the margin: the process of deciding how much more or less to do
cost/benefit analysis: a decision-making process in which you compare what you will sacrifice and gain by a specific action
marginal cost: the extra cost of adding a unit
marginal benefit: the extra benefit of adding a unit

4. Chapter 1: Section 2 Opportunity Cost

5. Objectives Explain why every decision involves trade-offs.
Summarize the concept of opportunity cost.
Describe how people make decisions by thinking at the margin.

6. Guiding Question As you listen, ask yourself the guiding question ……
How does opportunity cost affect decision making?

7. Trade-Offs When making decisions people face trade-offs
A trade-offs is the act of giving up one thing when we choose another
Someone who chooses to spend more time at work has less time to

8. Businesses and Governments
A business that uses all its factories to make chairs cannot make tables at the same time
A country that produces many military goods has fewer resources to use for consumer goods

9. Guns or Butter
Economists use the term guns or butter to describe this last type of trade-off
A person who chooses one alternative gives up other alternatives
The most desirable alternative given up is called the opportunity cost

10. Opportunity Cost
For example, suppose you have to choose between sleeping late and getting up early to study for a test
The opportunity cost of more study time is less sleep
The opportunity cost of more sleep is less study time

11. Thinking at the Margin
Making decisions also involves thinking at the margin – deciding how much more or less to do
In the example, the decision was between sleeping late and studying
By thinking at the margin you might choose to sleep one hour less so you could have one more hour to study

12. Cost Benefit Analysis
To make a decision at the margin, compare what you will give up to what you will gain
This process is called cost benefit analysis
To make good decisions at the margin, think about marginal costs and marginal benefits

13. Costs vs. Benefits
The marginal cost is the extra cost of adding one more unit …… getting one more hour of sleep
The marginal benefit is the extra benefit of adding that unit …… getting a better grade on the test
If the marginal benefits are greater than the marginal costs it is a good idea to add more units

14. The Guiding Questions
Using what you have learned, answer the guiding question ……
How does opportunity cost affect decision making?

15. Review How does opportunity cost affect decision making?
Every time we choose to do something, like sleep in late, we are given up the opportunity to do something less, like study an extra hour for a big test
When we make decisions about how to spend our scarce resources, like money or time, we are giving up the chance to spend that money or time on something else

16. Trade-offs
All individuals, businesses, and large groups of people make decisions that involve trade-offs.
Trade-offs involve things that can be easily measured such as money, property, and time or things that cannot be easily measured, like enjoyment or job satisfaction.

17. Businesses and Governments
Businesses make trade-offs when they decide how to use their factors of production.
A farmer who uses his or her land to plant broccoli, for example, cannot use that same land to plant squash.
Governments also make trade-offs when they decide to spend their money on military needs instead of domestic ones, and vice versa.

18. Opportunity Costs
In most trade-offs, one of the rejected alternatives is more desirable than the rest
The most desirable alternative somebody gives up as a result of a decision is the opportunity cost

19. Decision-Making Grids
Checkpoint: Why does every choice involve an opportunity cost?
We always face an opportunity cost. When we select one alternative, we must sacrifice another.
Checkpoint Answer: Because when you select one alternative, you must sacrifice another.

20. Decision-Making Grids
Using a decision-making grid can help you decide if you are willing to accept the opportunity cost of a choice you are about to make
Checkpoint Answer: Because when you select one alternative, you must sacrifice another.

21. Trade-offs
Checkpoint Answer: Because when you select one alternative, you must sacrifice another.

22. Thinking on the Margin
When you decide how much more or less to do, you are thinking on the margin.
Deciding by thinking on the margin involves comparing the opportunity costs and benefits.
This decision-making process is called a cost/benefit analysis.

23. Marginal Costs and Benefits
To make good decisions on the margin, you must weigh marginal costs against marginal benefits.
The marginal cost is the extra cost of adding one unit such as sleeping an extra hour or building one extra house.
The marginal benefit is the extra benefit of adding the same unit.
Once the marginal costs outweigh the marginal benefit, no more units can be added.

24. Cost/Benefit Analysis
The cost/benefit analysis below shows the opportunity costs and benefits of extra hours of sleep against extra house of study time.
What is the opportunity cost of one extra hour of sleep? What is the benefit?
Answers: one extra hour of study time; a higher grade on the test.

25. Decision-Making on the Margin
Like opportunity cost, thinking at the margin applies not just to individuals, but to businesses and governments as well.
Employers think at the margin when they decide how many workers to hire.
Legislators think at the margin when they decide how much to increase government spending on a particular project.