Ch 1 Sec 3: Trade-offs & Opportunity Costs

Section Three

Key Vocabulary
• Tradeoff
• opportunity cost
• production possibilities frontier
• cost-benefit analysis
• free enterprise economy
• standard of living

Trade-Offs
• The alternative choices people face in making an economic decision.
• A decision-making grid lists the advantages and disadvantages of each choice.

Opportunity Cost
• the cost of the next best alternative among a person’s choices. The opportunity cost is the money, time, or resources a person gives up, or sacrifices, to make his final choice.
Example:
• I want to go to Ozzfest. Tickets are $10, but it’ll take $40 in gas and I’ll need $50 for a tshirt and some drinks.
• So I need $100. With that same money, I could go see Piranha 3D, buy a new pair of Converse, and get a new pair of plugs, or go to see Eminem in concert.
• What’s the trade-off I choose to make for the Ozzfest experience?
• What’s my opportunity cost?

Production Possibilities Frontier
• A visual diagram of opportunity cost.
• It shows the combinations of goods and/or services that can be produced when all productive resources are used.
• The line on the graph represents the full potential—the frontier—when the economy employs all of these productive resources

• The PPF allows us to consider different ways to totally use resources and analyze the combination of goods and services that leads to maximum output.
• An economy pays a high cost if any of it resources are idle (not being used).
– It cannot produce on its frontier and it will fail to reach its full production potential.
Ways to increase the PPF:
Add:
• Resources
• a larger labor force
• increased productivity


Put it all together to make a decision
• Economists look at the trade-offs, opportunity costs, and the PPF to make a decision
• This cost-benefit analysis helps economists evaluate alternatives by looking at each choice’s cost and benefit.
• This allows them to make the best decision based on the information they have

So…why study economics?
1. It helps us know how the economy works on a daily basis.
2. It helps us understand a free enterprise economy, where people and privately owned businesses rather than the government make the majority of the economic decisions.
3. It helps us to become better decision makers.

Answer these questions in your notebook:
1. What do people try to achieve
when they make decisions or trade-offs?
2. Describe the relationship between trade-offs and opportunity costs.
3. List the decision-making strategies that economists use.