Trade-offs • Trade-off: exchanging one thing for the use of another. • Financial: Trading money for goods and services o If you trade $5 for more lives on Candy Crush you have traded the ability to use that money for anything else. • Personal: How you use your time o If you use those extra lives to play Candy Crush for an extra hour and a half, you have traded your ability to use that time for other activities. Cost of Trade-offs • What you give up to do something else. • That $5 could have been used for movies, other games, a Taco Bell run, books, or any number of other things. o Those are the Trade-offs for spending $5 on Candy Crush lives. • That hour and a half could have been spent watching movies, playing other games, going to Taco Bell, eating tacos then going to Walgreens for some antacids, reading books or any number of other things. o Those are the Trade-offs for spending and hour and a half playing Candy Crush. Opportunity Cost • Opportunity cost: The value of the next best alternative. • If your top choice would be to download and watch the movie “Big,” then your opportunity cost for the $5 is downloading “Big,” and your opportunity cost for the hour and a half is watching a movie. Production Possibilities Curve • Textbook Definition: A model to show the maximum combination of goods and services that can be produced from fixed resources. • Not as complex as it sounds! • Production: Making or doing something. • Possibility: What might happen. • Curve (for our purposes): A graphic representation of a relationship Curve 100 80 60 Curve 40 20 0 October January April July This curve shows the relationship between months and temperatures. Production Possibilities Curve Guns & Butter – The classic economic model Do activity 1 in your packet • Which car would you choose and why? • Answer on a separate sheet. • Address opportunity costs and tradeoffs in your answer. What do economists do? • Microeconomics: Study of behavior and decision making of small groups (individuals and firms) • Macroeconomics: Study of behavior and decision making of large groups (countries) • They Formulate theories and gather data • They don’t make value judgments (good or bad)… professionally. Economic Models • The economy is all of the activity in a nation that affects production, distribution and use of goods and services… o That’s a lot of stuff, so economists develop theories and create Economic Models, which are simplified representations of the real world that helps explain economic behavior. • Economics models: o Show visual representations of economic behavior o Assume that some factors remain constant o Show basic factors necessary to analyze a problem Creating a model • Formulate a hypothesis (an educated guess or prediction) and test it. • When models fail, it is often because: o People are unpredictable and do strange things o Models are simplifications and do not take into account all of the complexities of reality. Schools of thought • Economists deal with facts. However… • Opinions, beliefs and values can affect how those facts are interpreted and which facts are used to draw a conclusion. • Example: Underemployment o Raise minimum wage and increase taxes on the wealthy o Eliminate minimum wage and cut business taxes • Big idea: Economists deal with facts, but facts must be interpreted to be applied to life.