1. [ 1.2 ] Opportunity Cost and Trade-Offs

2. [ 1.2 ] Opportunity Cost and Trade-Offs
Learning Objectives
Identify why every decision involves trade-offs.
Explain the concept of opportunity cost.
Describe how people make decisions by thinking at the margin.

3. Making Decisions guns or butter
trade-off: the act of giving up one benefit in order to gain another, greater benefit
Individual Decisions
Time trade off
Business Decisions
Employment trade off
Government Decisions
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

4. Making Decisions
People who choose to volunteer face the cost of giving up their time but have the benefit of knowing that they are helping others or improving their community.

5. Opportunity Cost
opportunity cost: the most desirable alternative given up as the result of a decision
We always face an opportunity cost
Using a Decision-Making Grid
can help you determine whether you are willing to accept the opportunity cost of a choice you are about to make.
Making the Decision
When we select one alternative, we must sacrifice at least one other alternative and its benefits.

6. Thinking at the Margin
thinking at the margin: the process of deciding whether to do or use one additional unit of some resource
Analyzing Costs and Benefits
cost/benefit analysis: a decision-making process in which you compare what you will sacrifice and gain by a specific action
Making Decisions at the Margin
marginal cost: the extra cost of adding one unit
marginal benefit: the extra benefit of adding one unit
Employers think at the margin when they decide how many extra workers to hire.
Legislators think at the margin when deciding how much to increase spending on a government program.

7. Thinking at the Margin
Businesses analyze their marginal costs when making decisions about production. As long as the marginal benefit is greater than the marginal cost, this manufacturer will produce more toys.

8. Thinking at the Margin
Karen decides to wake up two hours earlier to study with the expectation of raising her grade to a B. Analyze Charts Do you agree with that decision? Why or why not?

9. [ 1.3 ] Production Possibilities Curves

10. [ 1.3 ] Production Possibilities Curves
Learning Objectives
Interpret a production possibilities curve.
Explain how production possibilities curves show efficiency, growth, and opportunity cost.
Explain why a country’s production possibilities depend on its resources and technology.

11. Production Possibilities
production possibilities curve: a graph that shows alternative ways to use a country’s productive resources
Drawing a Production Possibilities Curve
Begins by deciding which goods or services to examine.
vertical axis of the graph represents one product/service
horizontal axis shows represents the other product/service
Plot points are the options
Connecting the dots creates the
production possibilities frontier: a line on a production possibilities curve that shows the maximum possible output an economy can produce
Trade-Offs Along the Production Possibilities Frontier
Each point on the production possibilities frontier reflects a trade-off
These trade-offs are necessary because factors of production are scarce.

12. Changing Production Possibilities
A production possibilities frontier represents an economy working at its most efficient level
Efficiency: the use of resources in such a way as to maximize the output of goods and services
The economic policies that a nation enacts can also affect efficiency
Underutilization: the use of fewer resources than an economy is capable of using
Growth
A production possibilities curve is a snapshot.
Available resources are constantly changing.
If the quantity or quality of land, labor, or capital changes, then the curve will move
Shift to the left = decrease of production
Shift to the right = increase of production

13. Changing Production Possibilities
Opportunity Cost
Clearer way to see opportunity cost
Law of increasing costs: an economic principle which states that as production shifts from making one good or service to another, more resources are needed to increase production of the second good or service
The law of increasing costs explains why production possibilities curve.
Technology
The process used to create goods and services
One of the factors that can increase a nation’s efficiency.
Training
an develop and use new technologies
Highly skilled workers can increase efficiency and lead to economic growth

14. Production Possibilities
Capeland can produce these different combinations of watermelons and shoes. Analyze Charts If Capeland produces 20 million tons of watermelons, how many pairs of shoes can it produce?

15. Changing Production Possibilities
Analyze Graphs Based on this curve, how would you describe a situation in which Capeland produces 10 million tons of watermelons and 10 million pairs of shoes?

16. Changing Production Possibilities
The Gross Domestic Product (GDP) measures goods and services produced in a nation. When unemployment rises, the economy is operating inefficiently and overall productivity decreases.

17. Changing Production Possibilities
This photograph shows an area of farmland that was converted to housing. The opportunity cost of the housing is the crop that could have been grown on that farmland.