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Opportunity Cost & Production Possibility Curve
Transcript of Opportunity Cost & Production Possibility Curve
East High School
You have a ton of homework/studying to do. You take the ACT in a week and have some serious studying to do. However, your friend texts you and tells you that there is a party tonight. You consider your options and quickly decide that a party would be way more fun than studying.
Every time you choose to do something, you give up the opportunity to do something else.
Your decision to go to the party cost you the time you needed to study. Was the benefit of your choice worth it?
The act of giving up one benefit in order to gain another, greater benefit
Henry decides to work on Saturdays. He looses time hanging out with his friends but the trade-off is he earns money for a car.
Individuals, Businesses and Governments make decisions that involve trade-offs.
A farmer who plants broccoli cannot at the time use the same area of land to grow corn
"guns or butter"
A country that decides to produce more military goods (guns) has fewer resources to produce consumer goods (butter) and vice versa.
Example: Should we fund a war abroad (Iraq) or deal with rising food, oil and health care costs here in the United States
The most desirable alternative given up as a result of a decision.
Opportunity Cost Example:
In most trade-offs, one of the rejected alternatives is more desirable than the rest...
You wake up 2 hours early to study for a big test. The opportunity cost is the extra sleep time you missed out on.
Cost Benefit Analysis
Cost Benefit Analysis:
A decision-making process in which you compare what you will sacrifice and gain by a specific action
The extra cost of adding one unit (losing hours of sleep)
The extra benefit of adding one unit (extra hours of study time and better grade on test)
Make your own Cost Benefit Analysis Chart
Heather must decide whether to pick up an extra shift on Saturday mornings at her restaurant job or stay home to sleep-in and catch up with her friends and family.
Remember to include: Benefits, Benefits forgone, both options (extra shift or sleep-in, spend time with friends and family) and opportunity cost. Once you are done, identify the marginal cost and marginal benefit for this scenario.
Production Possibilities Curve
a graph that shows alternative ways to use an economy's resources.
Economists often use graphs to analyze the choices and trade-offs that people, businesses and governments make.
Graphs make it easy to see how one value relates to another value
Production Possibilities Curve Example
Government officials must decide whether to use Capeland's resources to manufacture shoes or to grow watermelons.
1. If Capeland uses all of its resources to produce only shoes, it could produce 15 million pair of shoes
2. If Capeland uses all of its resources to produce watermelons, it could produce 21 million tons of watermelon.
1. Who makes trade-offs?
2. Why do decisions involve trade-offs?
3. How does opportunity cost differ from a tradeoff?
Trade-off: Broccoli is more profitable
3. Capeland can use their resources to produce BOTH shoes and watermelons
Production Possibilities Frontier
A line on the production possibilities curve that shows the maximum possible output an economy can produce
So, the production possibilities frontier would show the maximum number of shoes and watermelons that Capeland could produce if they used all their resources
Production Possibility Curves show...
-use of goods and services in a way to maximize output
-the use of fewer resources that an economy is capable of using
- the opportunity cost in a decision.
Law of Increasing Cost
Principle that states that as production shifts from making one good to another, more and more resources are needed to increase production of the second good.
Example-Figure 1.3 on page 17.
Cost Analysis Benefit Practice
Make a cost analysis chart for the following scenario: José