Economics Chapter 1 Section 3

Trade-offs Trade-offs- alternative choices whenever people make an economic decision Looking at the advantages and disadvantages of making different purchases- some have additional costs Use of grid to make decisions

Opportunity Costs Opportunity costs- the cost of the next best alternative use of money, time, or resources Exp.- you buy a car for $5,000- what is the opportunity cost? Time also has opportunity cost

Production possibilities frontier Production possibilities frontier- a diagram representing various combinations of goods and or services an economy can produce when all productive resources are fully employed All points on the curve represent maximum combinations of output possible if all resources are fully employed, any points outside the curve cannot be reached

Production possibilities frontier Opportunity cost can be visualized on the production possibilities curve Cost of idle resources- the curve cannot reach its full potential when resources are not employed Economic growth is made possible by having more resources or increased productivity

Building simple models Models are based on assumptions or things we take for granted as true, we use them as facts even though we can’t be sure they are- the quality of the model is no better then the assumptions it is based on Models can be adjusted to make better predictions the next time

Cost-benefit analysis Cost benefit analysis- a way of thinking about a problem that compares the cost of an action to the benefits received Businesses make investment decisions in exactly this manner- investing options that give the highest return per dollar Decisions are best made in small, incremental steps toward the final goal

The road Ahead Free enterprise economy- one in which consumers and privately owned businesses make the majority of the what, how, and for whom decisions Variety of topics and issues Standard of living- the quality of life based on the possession of the necessities and luxuries that make life easier

The Road Ahead Economic issues are debated in politics and there are a number of issues related to government Rational choice is taking the things with greater value and giving up those with lesser value People do not think the same way People have different degrees of ambition, strength and luck