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Economics Ch 1, Sec. 2 – Opportunity Cost. Trade-off An alternative that we sacrifice when we make a decision.

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Presentation on theme: "Economics Ch 1, Sec. 2 – Opportunity Cost. Trade-off An alternative that we sacrifice when we make a decision."— Presentation transcript:

1 Economics Ch 1, Sec. 2 – Opportunity Cost

2 Trade-off An alternative that we sacrifice when we make a decision

3 Guns or butter A phrase that refers to the trade-offs that nations face when choosing whether to produce more or less military or consumer goods

4 Opportunity cost The most desirable alternative given up as the result of a decision

5 Thinking at the margin Deciding whether to do or use one additional unit of some resource

6 Why must the opportunity cost of a decision always be something desirable? An opportunity cost must be desirable because there would be no meaningful decision to be made between a desirable option and an undesirable.

7 What is involved in a “guns or butter” decision? “Guns or butter” refers to whether a country chooses to produce more military goods (“guns”) or more consumers goods (“butter”).

8 What does it mean to “think at the margin”? “Thinking at the margin” means making a decision about how much more or less to do. It allows people to evaluate options based on available resources.

9 Economics, Ch 1, Sec 3 Production Possibilities Curves

10 Production possibilities curve A graph that shows alternative ways to use an economy’s resources

11 Production possibilities frontier The line on a production possibilities graph that shows the maximum possible output

12 Underutilization Using fewer resources than an economy is capable of using

13 Cost To an economist, the alternative that is given up because of a decision

14 Efficiency Using resources in such a way as to maximize the production of goods and services

15 Law of increasing costs Law that states that as we shift factors of production from making one good or service to another, the cost of producing the second item increases

16 How is underutilization depicted on a production possibilities frontier? Underutilization is shown by any point that appears inside the production possibilities frontier

17 How does a production possibilities curve illustrate the efficiency of an economy? A production possibilities curve shows the maximum possible output along the production possibilities frontier. If a country’s economic production is on the frontier, the economy is producing at top efficiency

18 How does a production possibilities curve illustrate opportunity cost? Opportunity cost can be illustrated by comparing the data at various points on the production possibilities frontier. As production of one element increases, the curve shows the decrease in production of the other element: opportunity cost.

19 Illustrate the impact of a drought on a production possibilities curve for farm goods.

20 Illustrate the impact of the invention of new technology on a production possibilities curve for factory goods.


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