Opportunity Cost
• Value of the “next best alternative”
Concert
Climbing
or
Mountain
• You have $100 to spend at the mall, rank the
following in the order (1, 2, 3) you would
purchase them.
DVD set of a TV Show($60)
New outfit ($85)
New pair of shoes ($65)
• WHAT IS #1?
• WHAT IS YOUR OPPORTUNITY COST
FOR #1?
HOW TO DECIDE?
The Decision-Making Model
1. List the alternatives
2. State the criteria
The Decision-Making Model
3. Evaluate the alternatives
a. Trade-off: the act of making the choice
b. Opportunity cost: the next best
alternative given up when individuals,
businesses, and governments confront
scarcity by making choices.
The Decision-Making Model
4. Make rational decisions
a. Marginal benefit: the extra benefit
b. Marginal cost: the extra cost
c. When marginal benefit is greater than the
cost, he marginal benefit should be obtained.
d. When the marginal benefit is less than the
marginal cost, the desired good is not worth
the cost and should not be obtained.
Rational
decisions
occur when the
marginal
benefits of an
action equal or
exceed the
marginal costs.
Does the benefit exceed the cost?
Decision-Making Model
Karen’s Decision-making Grid
Alternatives
Sleep late
Wake up early to study
Benefits
• Enjoy more sleep
• Have more energy during the day
• Better grade on test
• Teacher and parental approval
• Personal satisfaction
Decision
• Sleep late
• Wake up early to study for test
Opportunity cost
• Extra study time
• Extra sleep time
Benefits forgone
• Better grade on test
• Teacher and parental approval
• Personal satisfaction
• Enjoy more sleep
• Have more energy during the day
Summary Questions
1.
2.
3.
4.
Explain the decision making model?
What is a trade-off?
What is the opportunity cost?
When the marginal ___________ is greater
than the cost, the marginal benefit should be
obtained.
5. When the marginal benefit is less than the
marginal___________, the desired good is
not worth the cost and should not be obtained.
Production Possibilities Frontier
When a company plots their
opportunity costs and decides
what is most profitable to
produce
PPC
A graph that shows the trade-off between
two production options
– A visual representation of OPPORTUNITY
COSTS
PPC – an example
• Suppose a country
makes Pencils and
Pens.
• If they devoted ALL
of their resources to
pencils, they could
make 500 a day
• …..to pens, they
could make 300 a
day
500
300
PPC – an example
500
Pencils
The country/business can
produce anywhere on the line
when they use ALL of their
resources
Pens
300
PPC – an example
If the country is producing ONLY
pencils, and they want pens, they
have to give up pencils.
500
450
Pencils
The more pens they want…..
200
125
200
Pens
300
PPC – an example
500
At point X, the country or
business is producing
below its possibilities and
is INEFFICIENT
Y
Pencils
200
At point Y, the country or
business is producing
beyond its possibilities and
is NON-SUSTAINABLE.
X
75
Pens
300
Graph this country’s PPC
After graphing, answer these questions:
Food Computers
200
0
180
25
150
50
100
75
25
100
0
110
1. Assume the country is currently
producing 180 of food and 25 of
computers. If the country wants to
make 75 of computers, how many
of food must they give up?
2. If the country was producing 150
of food and 30 of computers, what
could you conclude about the
country’s economy?
Production Possibilities
Frontier
If more
computers
are
produced,
less food is
produced.
If more
Food
is produced,
fewer
computers
are
produced
The Production Possibilities Curve
1. The production process takes
inputs and uses them to
produce outputs. Inputs
include land, labor, capital,
and entrepreneurs.
2. The PPF curve measures the
maximum combination of two
outputs that can be achieved
from a given number of inputs.
It demonstrates the trade-off
among choices, given existing
institutions, resources, and
technologies.
3. The curve slopes downward
from left to right. This
represents the opportunity cost
because you always have to
give up some product A to get
more product B.
4. The curve bowed out to
represent the principle of
increasing marginal
opportunity cost: in order to get
more of something, one must
give up increasing quantities of
something else.
5. Point A, B, and C
represents efficiency:
achieving as much output
as possible from a given
number of inputs.
6. Point Y represents an
unattainable point at the
moment because of
limited resources or
technology.
7. Point X represents an
attainable point but
undesirable.
Reasons for a shift
1. Technology
2. Resources
Draw these PPFs on your own
paper
Choice
Steel
Food
Choice Steel
A
B
C
D
0
25
50
75
Food
100
90
70
40
A
0
120
B
25
115
C
50
105
D
75
90
E
100
60
F
125
0
Draw these PPFs on your own
paper
Choice Guns Flowers
Choice
A
0
100
1
Econ
Grade
80
Math
Grade
0
B
25
90
2
65
50
C
50
70
3
30
75
D
100
0
4
0
80
Summary Questions
1. What does A, B, and C represent on the
PPF curve?
2. What does X represent on the PPF
curve?
3. What does Y represent of the PPF
curve?
4. What are the reasons for a shift in the PP
curve?