Economic Choices

1. Economic Choices Opportunity Cost and the Production Possibilities Curve Chapter 1, Section Three

2. Key Assumptions in Economics • People are rationally self-interested • They seek to maximize their utility (happy points) • People generally make decisions at the margin • They weigh the marginal benefit against the marginal cost of a decision • Ceteris Paribus • All other factors held constant

3. Basic Economic Vocabulary • Economics • The study of choices people make to satisfy their needs and wants • Microeconomics • The study of how individuals and firms deal with scarcity • Macroeconomics • The study of how society as a whole deals with scarcity

4. Basic Economic Vocabulary • Needs • Necessities for survival • Wants • Goods and services consumed beyond what is necessary for survival

5. The Fundamental Problem of Economics: Scarcity OR

6. Question 1 Microeconomics • Deals with individuals and firms • Deals with the global economy • Is only concerned with governments • Studies excesses in various economies

7. Opportunity Cost • Opportunity cost is the next best alternative use for a resource. • Ex. If the 3 cups of flour are used to bake bread, then the opportunity cost is the cake that could also have been baked with the 3 cups of flour. • No matter what we do with our time or resources, we always incur opportunity cost. TINSTAAFL.

8. High or low Opportunity Cost? • The more we give up of something, the higher the opportunity cost. • Example: I could have went to Hawaii on vacation, but I chose Alaska for the wildlife and wilderness.

9. Question 2 For Rise Cupcakes, opportunity costs tend to rise when they • Close just after Thanksgiving • Close the entire week before Valentine’s day • Stay open until midnight before holidays

10. TINSTAAFL There is no such thing as a free lunch.

11. TINSTAAFL Everything has a cost.

12. TINSTAAFL Illustrated: The PPC • The PPC = The Production Possibilities Curve • The PPC = a graph showing all of the possible combinations of output for an economy fully employing all of its resources in producing 2 goods.

13. Non Linear Model Point C: Unattainable Must Increase Factors of Production to Reach Guns Point B: Efficient and Attainable Point A: Attainable but inefficient Butter

14. Question 3 John likes donuts best, cupcakes second best, and really doesn’t like shortbread cookies. John chooses donuts. What is John’s opportunity cost? • Shortbread cookies • Donuts • Cupcakes • Shortbread cookies and cupcakes

15. Simple Linear Model • Say you are a house painter and you and your crew can paint either 20 small houses or 10 large houses in a week. You can also paint a number of combinations of the two. • It takes the same amount of time to paint one large house as it does to paint 2 small houses.

16. Simple Linear Model • So what is the opportunity cost of painting one large house? • What is the opportunity cost of painting two small houses?

17. Question 4 A production possibilities curve shows how • How a country can produce 4 to 5 products • One product can be produced without giving up any production of another product • Resources can best be utilized to produce products • That it is impossible to produce more than one product at a time.

18. Simple Linear Model

19. Simple Linear Model • We use these points on a graph to find the PPF 10 Large Houses 5 0 0 10 20 Small Houses

20. TINSTAAFL Illustrated: The PPC

21. Growth Illustratedor Trade F.O.P. Technology . .  Capital Goods  PPC PPC1  Consumer Goods

22. Law of Increasing Opportunity Costs • A PPC is curved out because as you product more of one product you give up more and more of the other. • Resources in the production one thing or not necessarily as efficient in production of anothergood.

23. Question 5 Which of these will cause the PPC to shift outward indicating economic growth? • Trade • Increase Factors of Production • Increase technology • All of these