1 Section 1.3 Economic Choices and Decision Making

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Section 1.3 Economic Choices and Decision Making

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If you know the rules of the game, do you stand a better chance of winning?

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What Do You Make Choices About Every Day?

• How do you make good decisions on what to do and how to do it?

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How do you choose?

One? Or the other?

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We constantly make decisions in lives. As the world becomes more complex and more choices are available, decision-making can becomes very difficult. We can allow ourselves to be overwhelmed and let life make our decisions. I usually feel that the fewer choices I have, the easier and more effectively I can make a decision. How do I reduce the range of choices I have so that I am less harried about making a decision? At this point, think how much easier it would be to make decisions if we had a tool to help simplify matters

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When I go the store, I see hundreds of items arranged to catch my attention.

And then I see something that I think is really interesting! Should I buy it, should I shop around elsewhere for it, is it good value for money, what am I going to do with it? … I just can’t make up my mind.

Economics has a simple tool! I draw a mental box just like on page 20! Is this a need or a want? What value it will bring to my life: high or low? If the value is high and it is a need, then I buy it. If the value is low and it is a want, then I don’t bother with it. If the value is low but it is a need, then I might shop around for it. If the value is high and it is a want but not a need, then I might consider treating myself to it. Therefore, I essentially break down a decision into simple terms that help me make up my mind.

This is simplified Cost-Benefit Analysis!

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Thinking Like an Economist

•In what ways do economists make decisions?

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The Production Possibilities Frontier is the second model Economists use.• The Production Possibilities Frontier is

also known as the PPF.• The PPF is a basic workhorse model in

economics.

Important for understanding some basic issues in economics.

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The PPF helps to illustrate many

concepts. • Concepts Illustrated by the Production

Possibilities Frontier • Scarcity• Efficiency• Tradeoffs• Opportunity Cost• Economic Growth

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The Production Possibility Frontier - What Is It?

• The description of the best possible combinations of two goods to produce using all of the available resources.

• Shows the trade-off between more of one good in terms of the other.

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Production Possibilities Frontier

A B C D E F G

units of potatoes

6 5 4 3 2 1 0

units of apples

0 1 2 3 4 5 6

Production Possibilities FrontierProduction Possibilities Frontier

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units of potatoes

units ofapples

A B C D E F G

units of potatoes

6 5 4 3 2 1 0

units of apples

0 1 2 3 4 5 6

6

5

4

3

2

1

1 2 3 4 5 6

A

B

C

D

E

F

G

Production Possibilities Frontier

Production Possibilities Frontier

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units of potatoes

units ofapples

6

5

4

3

2

1

1 2 3 4 5 6

A

B

C

D

E

F

G

Constant Cost

One unit of apples costs one unit of potatoes.

One unit of potatoes costs one unit of apples.

Production Possibilities Frontier

Production Possibilities Frontier

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units of potatoes

units ofapples

12

10

8

6

4

2

1 2 3 4 5 6

A

B

C

D

E

F

G

Constant Cost

What if? One unit of apples costs two units of potatoes?

One unit of potatoes costs one-half unit of apples.

Production Possibilities FrontierProduction Possibilities Frontier

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units of potatoes

units ofapples

6

5

4

3

2

1

1 2 3 4 5 6

A

B

C

D

E

F

G

I

Production Possibilities FrontierProduction Possibilities Frontier

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units of potatoes

units ofapples

6

5

4

3

2

1

1 2 3 4 5 6

A

B

C

D

E

F

G

I

Can this society produce at production combination H?

H

Production Possibilities Frontier

Production Possibilities Frontier

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Events that can expand production possibilities outward…

•A technological advance

• rail cars• refrigeration• computers

•An increase in human or natural resources

• population increase• new discoveries

•Capital investment

• new factories• new infrastructure

Production Possibilities FrontierProduction Possibilities Frontier

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units of capital goods

units ofconsumer

goods

6

5

4

3

2

1

1 2 3 4 5 6

A

B

C

D

E

F

G

Production Possibilities Frontier

One unit of capital goods costs one unit of consumer goods.One unit of consumer goods costs one unit of capital goods.

Production Possibilities FrontierProduction Possibilities Frontier

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Is knowing something about Economics valuable in your daily life? Do you make decisions daily?

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• Microeconomics focuses on the individual parts of the economy• How households and firms make decisions and how they

interact in specific market settings.

• Macroeconomics looks at the economy as a whole.• Economy-wide phenomena, including inflation,

unemployment, and economic growth.

Microeconomics and Macroeconomics