E. Napp Opportunity Cost In this lesson, students will be able to define the following key words and concepts: Trade-offs Opportunity Cost Guns or Butter Thinking at the Margin

E. Napp Scarcity exists. We have endless desires but limited resources. In Economics, we must choose.

E. Napp Trade-off A trade-off occurs when we choose one course of action over another. In Economics, we can never have everything we want or need. We must make choices. A woman spends ten dollars buying her lunch at a local restaurant. She cannot use the same ten dollars to buy a book. A trade-off has occurred.

E. Napp Sometimes a society is more concerned with economic growth than environmental quality.

E. Napp It’s All About Scarcity! Scarcity exists. Our wants and desires are limitless but our natural resources are limited. We can always want more than we have. As such, we are constantly choosing one course of action over another. We cannot spend ten dollars on a movie ticket and the same ten dollars on a restaurant meal.

E. Napp Opportunity Cost Whenever we make a decision, we receive one thing but give other things up. If I chose to study tonight for the examination, I cannot go to the party or the movies or walk the dog. OPPORTUNITY COST is the most desirable alternative given up for the decision is the. Think of the opportunity cost as the best course of action of all those things you didn’t get.

E. Napp Scarcity and opportunity costs affect individuals, businesses, and governments.

E. Napp Guns or Butter Government officials also must choose where to spend tax dollars. When a government spends more money on the military, it must invariably spend less money on consumer goods like roads and schools. Economists refer to government trade-offs as Guns or Butter.

E. Napp The Cost of War

E. Napp Thinking at the Margin Sometimes a decision involves whether to add or subtract one additional unit of a resource. After studying many hours, a student might ask herself: “Should I study one more hour?” This question is a question at the margin. Deciding whether to add or subtract one additional unit occurs at the margin.

E. Napp Should we study one more hour? That is thinking at the margin.

 Production Possibilities Curve: – A graph that shows alternative ways to use an economy’s resources  Factors of production (land, labor and capital) are used to determine how much of a good or service can be produced  Efficiency, Growth and Costs are factors that can be seen from production possibility graphs

 Two areas that often change  Economists collect data to create production possibility curves based on which goods and services a country can produce based on current resources  Resources include land and natural resources, work force, human and physical capital  Technology is considered both human and physical capital

 EFFICIENCY: Using resources in such a way as to maximize the production of goods and services  When this condition is present it is called the production possibilities frontier  Under Utilization : Using fewer resources than the economy is capable of supplying

Production Possibility Curve

 GROWTH: Condition that reflects a change in factors of production or when resources increase  When an economy grows the curve shifts to the right

 It is not necessarily money but the opportunity we give up when we choose one option over the other  Law of increasing costs : As production switches from one item to another more resources are needed to increase production of the second item.  **This is why production possibility frontiers usually curve**

E. Napp Questions for Reflection Provide examples of trade-offs. Why do trade-offs exist? What is the opportunity cost? Provide an example of an opportunity cost? What is thinking at the margin? Provide an example of thinking at the margin.