1.

3 Economic Choices and Decision Making

I. Trade-Offs
! Because people

cannot have everything they want, they face TRADE-OFFS (alternative choices) when spending their income or time.

!! In economics !! Cost means more than the price tag placed on a

II. Opportunity Cost

good or service . !! Cost can also be thought of in terms of OPPORTUNITY COST (the cost of the next best alternative use of money, time, or resources when one choice is made rather than another).! Opportunity costs are opportunities LOST.

!! The NEXT BEST alternative like choosing

between two similar options. !! EXAMPLE: !! You have $100 for one day at either:

III. Production Possibilities Frontier

!! To illustrate

opportunity cost, economists uses the PPF. !! Its a graph that shows the choices society must make in deciding how to use its relatively scarce resources.

!! IN ORDER TO LIMIT THE VARIABLES INVOLVED

SO THAT THE MODEL IS EASIER TO DEAL WITH, TWO ASSUMPTIONS ARE MADE: !! (1) amount of available resources and technology will not change during the period being studied. !! (2) all natural, human, and capital resources are being used in the most efficient manner possible. (maximum efficiency)

Point A anything inside the curve is NOT efficient, but IS possible

Draw this graph Point B anything outside the curve is NOT possible with the resources at this time

The curve/arc represents most efficient combination of resources

You decide to increase your wine production from 9 units of wine to 14 units of wine.

6 units of grain

What is your OPPORTUNITY COST for increasing wine production(what you gave up)?

GRAPH THIS! MACHINES 1 unit = 10,000 Machines 0 1 2 3 4 5 6 GRAIN 1 unit = 50,000 Bushels 30 28 25 21 15 8 0

What is your opportunity cost if you increase your machines from 3 units to 5 units? "! How about increasing 1 unit to 2 units of machines?
"!