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Chapter 2 Choice, Opportunity Costs and Specialization Economics, 7th Edition Boyes/Melvin.

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Presentation on theme: "Chapter 2 Choice, Opportunity Costs and Specialization Economics, 7th Edition Boyes/Melvin."— Presentation transcript:

1 Chapter 2 Choice, Opportunity Costs and Specialization Economics, 7th Edition Boyes/Melvin

2 Copyright © Houghton Mifflin Company. All rights reserved. 2 | 2 Opportunity Cost Opportunity cost: the value of the highest-valued alternative that must be forgone when a choice is made. It is the evaluation of a trade-off. Marginal benefits and costs: the benefits and opportunity costs associated with one additional unit of the good.

3 Copyright © Houghton Mifflin Company. All rights reserved. 2 | 3 Opportunity Costs and Concerts You’ve just won a free ticket to see a Madonna concert. U2 is performing on the same night. Tickets to see U2 cost $75. On any given day, you would be willing to pay up to $100 to see U2. Based on this information, what is the opportunity cost of seeing Madonna? (a) $0, (b) $25, (c) $75, or (d) $100.

4 Copyright © Houghton Mifflin Company. All rights reserved. 2 | 4 Opportunity Costs The opportunity cost of seeing Madonna is the total value of everything you must sacrifice to attend her concert - namely, the value to you of attending the U2 concert. That value is $25 - the difference between the $100 that seeing his concert would be worth to you and the $75 you would have to pay for a ticket.

5 Copyright © Houghton Mifflin Company. All rights reserved. 2 | 5 Decision Making Principle: Decision making involves trade-offs. A trade-off means a sacrifice--giving up one good or activity in order to obtain some other good or activity.

6 Copyright © Houghton Mifflin Company. All rights reserved. 2 | 6 Production Possibilities Curve The production possibilities curve shows the maximum quantity of goods and services that can be produced when the existing resources are used fully and efficiently.

7 Copyright © Houghton Mifflin Company. All rights reserved. 2 | 7 Production Possibilities Underutilized (Inefficient) Nondefense Goods B1B1 F1F1 C1C1 D1D1 Only nondefense goods produced E1E1 Only defense goods produced A1A1 Efficient Combinations Defense Goods Impossible 200 175 150 125 100 75 0 2550 G1G1 100 125 DefenseNon-defense A1A1 2000 B1B1 17575 C1C1 130125 D1D1 70150 E1E1 0160 F1F1 13025 G1G1 20075 150

8 Copyright © Houghton Mifflin Company. All rights reserved. 2 | 8 Growth The PPC moves outward (growth occurs) as the result of: –Increased resources Larger labor force Change in labor force participation Chance in labor-leisure decision –Improved technology (innovation) –Expansion of capital stock –An improvement in the rules (laws, institutions, and policies) of the economy

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