Economics 1-3:

ESSENTIAL QUESTION: What is the relationship between trade-offs and opportunity costs?

GPS STANDARD:

SSEF2-

a.) Illustrate by means of a production possibilities curve the trade-offs between two economic choices

Trade-Offs and Opportunity Cost

• The process of making a choice is not always easy. Services are work performed for someone and are intangible.

• Because resources are scarce, consumers need to make wise choices.

• To become a good decision maker, you need to know how to identify the problem and then analyze your alternatives.

Trade-Offs and Opportunity Cost

• Finally, you have to make your choice in a way that carefully considers the costs and benefits of each possibility.

Trade-Offs and Opportunity Cost

• Trade-offs are the alternative choices people face in making an economic decision. A decision-making grid

lists the advantages and disadvantages of each choice.

• Opportunity cost is the cost of the next best alternative among a person’s choices. The opportunity cost is the money, time, or resources a person gives up, or sacrifices, to make his final choice.

Trade-Offs and Opportunity Cost

• Opportunity cost is the cost of the next best alternative among a person’s choices. The opportunity cost is the money, time, or resources a person gives up, or sacrifices, to make his final choice.

Trade-Offs and Opportunity Cost

• Why do you think economists believe opportunity cost is an important factor to consider in addition to monetary cost?

• The money, time, or resources given up when one choice is made rather than another are just as important as the monetary cost of the choice that was made.

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Production Possibilities

The production possibilities frontier diagram illustrates the concept of opportunity cost.

Production Possibilities

It shows the combinations of goods and/or services that can be produced when all productive resources are used.

Production Possibilities

The line on the graph represents the full potential—the frontier—when the economy employs all of these productive resources.

Production Possibilities

•Identifying possible alternatives allows an economy to examine how it can best put its limited resources into production.

Production Possibilities

•Considering different ways to fully employ its resources allows an economy to analyze the combination of goods and services that leads to maximum output.

Production Possibilities

•An economy pays a high cost if any of it resources are idle. It cannot produce on its frontier and it will fail to reach its full production potential.

Production Possibilities

GUNS OR BUTTER?

Production Possibilities

•Economic growth made possible by more resources, a larger labor force, new technology or increased productivity causes a new frontier for the economy.

Production Possibilities

With a larger labor force, more goods and services are created; newly discovered natural resources open up new products and services.

How might economic growth stimulate greater production possibilities?