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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.
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 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.