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Economic Choices and Decision Making 1.3

1.3. Because resources are scarce, businesses and consumers need to make wise choices. Trade-offs are the alternative choices people face in making an

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Economic Choices

and Decision Making

1.3

IntroductionBecause resources are

scarce, businesses and consumers need

to make wise choices.

Trade-offs are the alternative choices

people face in making an economic decision.

Thinking on the margin, or MARGINAL ANALYSIS, involves making decisions based on additional

benefit vs. additional cost

Would you see the movie three times?

Notice that the total benefit is more than the total cost but you

would NOT watch the movie the 3rd time.

Thinking at the Margin

# Times Watching Movie

Benefit Cost

1st $30 $10

2nd $15 $10

3rd $5 $10

Total $50 $30

Trade-Offs and Opportunity Cost

Opportunity cost is the cost of the next

best alternative among choices. The opportunity cost is the money, time, or resources a person

gives up to make his final choice.

Trade-Offs and Opportunity Cost

Opportunity costs are experienced when trade-offs

are made.

Production PossibilitiesThe Production Possibilities Frontier is a

graph that shows the various combinations that can be produced when all resources are used. In short, it shows us the opportunity

costs of producing each product.

Production Possibilities

Production Possibilities Frontier

?

Production Possibilities Frontier

Production Possibilities Frontier

Production Possibilities FrontierThe line on the graph

represents the full potential (the frontier) - when the economy employs all of their productive resources.

Production Possibilities FrontierEconomic growth is needed for

“C”• more resources• a larger labor force• increased

productivity

Production Possibilities FrontierAn economy pays a high

cost if any of its’ resources are idle:

It cannot produce on its frontier and it will fail to reach its full production potential.

Thinking Like an Economist

Building simple models like the PPF helps economists analyze or describe actual economic situations.

Cost-benefit analysis helps economists evaluate alternatives by looking at each choice’s cost and benefit.

The Road AheadStudying economics will help us know how the economy works on a daily basis.

It helps us understand a free enterprise economy, where people and privately owned businesses rather than the government make the majority of the economic decisions.

The Road Ahead

•to become better decision makers•understand the free-enterprise system•make wise voting decisions

The study of

economics helps us