EconomicsEconomics

Chapter 1Chapter 1

Section 3Section 3

Trade-offsTrade-offs

Trade-offsTrade-offs- alternative choices whenever - alternative choices whenever people make an economic decisionpeople make an economic decision

Looking at the advantages and Looking at the advantages and disadvantages of making different disadvantages of making different purchases- some have additional costspurchases- some have additional costs

Use of grid to make decisionsUse of grid to make decisions

Opportunity CostsOpportunity Costs

Opportunity costs-Opportunity costs- the cost of the next the cost of the next best alternative use of money, time, or best alternative use of money, time, or resourcesresources

Exp.- you buy a car for $5,000- what is the Exp.- you buy a car for $5,000- what is the opportunity cost?opportunity cost?

Time also has opportunity costTime also has opportunity cost

Production possibilities frontierProduction possibilities frontier

Production possibilities frontier-Production possibilities frontier- a a diagram representing various diagram representing various combinations of goods and or services an combinations of goods and or services an economy can produce when all productive economy can produce when all productive resources are fully employedresources are fully employedAll points on the curve represent maximum All points on the curve represent maximum combinations of output possible if all combinations of output possible if all resources are fully employed, any points resources are fully employed, any points outside the curve cannot be reachedoutside the curve cannot be reached

Production possibilities frontierProduction possibilities frontier

Opportunity cost can be visualized on the Opportunity cost can be visualized on the production possibilities curveproduction possibilities curve

Cost of idle resources- the curve cannot Cost of idle resources- the curve cannot reach its full potential when resources are reach its full potential when resources are not employednot employed

Economic growth is made possible by Economic growth is made possible by having more resources or increased having more resources or increased productivityproductivity

Building simple modelsBuilding simple models

Models are based on assumptions or Models are based on assumptions or things we take for granted as true, we use things we take for granted as true, we use them as facts even though we can’t be them as facts even though we can’t be sure they are- the quality of the model is sure they are- the quality of the model is no better then the assumptions it is based no better then the assumptions it is based onon

Models can be adjusted to make better Models can be adjusted to make better predictions the next timepredictions the next time

Cost-benefit analysisCost-benefit analysis

Cost benefit analysis-Cost benefit analysis- a way of thinking a way of thinking about a problem that compares the cost of about a problem that compares the cost of an action to the benefits receivedan action to the benefits receivedBusinesses make investment decisions in Businesses make investment decisions in exactly this manner- investing options that exactly this manner- investing options that give the highest return per dollargive the highest return per dollarDecisions are best made in small, Decisions are best made in small, incremental steps toward the final goalincremental steps toward the final goal

The road AheadThe road Ahead

Free enterprise economy-Free enterprise economy- one in which one in which consumers and privately owned consumers and privately owned businesses make the majority of the what, businesses make the majority of the what, how, and for whom decisionshow, and for whom decisionsVariety of topics and issuesVariety of topics and issuesStandard of living-Standard of living- the quality of life the quality of life based on the possession of the based on the possession of the necessities and luxuries that make life necessities and luxuries that make life easiereasier

The Road AheadThe Road Ahead

Economic issues are debated in politics Economic issues are debated in politics and there are a number of issues related and there are a number of issues related to governmentto governmentRational choice is taking the things with Rational choice is taking the things with greater value and giving up those with greater value and giving up those with lesser valuelesser valuePeople do not think the same wayPeople do not think the same wayPeople have different degrees of ambition, People have different degrees of ambition, strength and luckstrength and luck