Economic Decision Making

1. Economic Decision Making

2. 1-What three steps must one take to be a good decision maker? 1-Identify the problem 2-Analyze the alternatives 3-Make your choice so that you carefully consider the costs and benefits of each possibility

3. 2-What is the MAIN idea on page 20? Economic choices involve trade-offs and the careful evaluation of opportunity costs.

4. 3-What is a “trade-off”? Alternative choices When you give up one thing to get something else. We can’t have it all Economists are interested in how people respond to trade-offs.

5. 4-What is an “OPPORTUNITY COST”?

6. https://www.youtube.com/watch?v=NwOYLV-L7pc

7. Opportunity Cost People face a scarcity of time and money all the time We “spend” that time and don’t perceive it as a cost - but it is, as much as money spent is a cost But time is a scarce (desired/limited) resource, it has a value just like money and it operates the same way - once it’s “spent”, it’s “spent”

8. Opportunity Cost Trade-off Choosing to use a scarce good [time, money] for one thing and giving up the next best alternative. What you give up is the “opportunity cost” It is what you have lost in giving up the next best alternative.

9. Opportunity Cost Examples 1-If you study for one hour, you are giving something else up [going out to a movie] • The opportunity cost of studying is going out to a movie…. 2-You only have $50.00 and you spend it on a concert ticket, instead of spending it on dinner at a favorite restaurant. • The opportunity cost of the ticket is going out to your favorite restaurant. Time, as well as goods and services, is also scarce.

10. What are the opportunity costs of the following scenarios? [What was the next best alternative or trade-off?] 1-Watching television tonight. 2-Going to bed early. 3-Playing a high school sport. 4-Having an after-school job. 5-Going to college after you graduate from high school. 6-Going to work, instead of college, after you graduate.

11. Opportunity Cost Think of something you did recently. What was the opportunity cost of that action? Write it down It has to be something that you would actually do; it must be a realistic description of your loss.

12. 5-What is the MAIN idea on page 21? Economies face trade-offs when deciding what goods and services to produce.

13. “You Don’t Have to Spend a Buck to have a Cost” Read the four paragraphs Explicit Costs: out of pocket expenses/money spent. • Movie: price of ticket, snacks, gas to drive there if distant location. Implicit Costs: The value of resources that could have been used elsewhere. • Movie: pay earned if I had worked instead [opportunity cost]

14. “Practice with Opportunity Cost Analysis” In each of the 6 scenarios, there is a perceived opportunity cost. Given you knowledge of opportunity costs, explain each of the 6 scenarios. Is the opportunity cost in each scenario high or low?

15. Friday, 5/13/16, Day 3 Essential Skill: Demonstrate understanding of concepts 1-Economic Choices and Decision Making 2-The Production Possibilities Curve Introduction to Econ Test • Tuesday, 5/17

16. Production Possibilities Frontier/Curve

17. 6-What is the purpose of a “production possibilities curve”? To illustrate opportunity costs, economists use the PPC which is a diagram representing various goods and services an economy can produce when all of its resources [CELL] are in use.

18. Production Possibilities Frontier Model A MODEL IS A SIMPLIFIED REPRESENTATION OF REALITY. The Production Possibilities Frontier Model allows economists to visualize and better understand the tradeoffs a country makes when using its scarce resources

19. Production Possibilities Frontier Model

20. Assumptions of the Model • Full Employment: All factors of production [available resources] are being utilized. • Fixed Resources: Quantity and quality of the factors of production a fixed. • Fixed Technology: State of technology is constant. • Two Goods: The economy is only producing two goods.

21. Frontier means boundary or border and the PPF represents a border between what the country can produce and what it cannot produce using available resources.

22. PPC Explained • https://www.youtube.com/watch?v=O6XL__2CDPU

23. Law of Increasing Opportunity Cost • Explains why opportunity costs increase as the consumption of a good increases. • In order to get more of something, one must give up ever-increasing quantities of something else. • Some resources are better suited for the production of some goods than to the production of other goods. • Some of the country’s land is well suited to raise dairy cows; some for making guns

26. 8-What is the purpose of an “economic model”? A simplified equation, graph or figure showing how something in the economy works: PPC, Circular Flow Model

27. 9-What is “cost-benefit analysis”? The way most economic decisions can be evaluated. It is a way of comparing the costs of an action to the benefits received.

28. 10-What is a “free enterprise economy”? Where consumers and privately owned businesses, rather than the government, make the majority of economic decisions [What, How and For Whom?]

29. 11-Explain the term: “standard of living”. The quality of life based on the ownership of the necessities and luxuries that make life easier.

30. The Dreaded Disease

31. Dreaded Disease • Read through the dreaded disease scenario • Answer the questions • Keep in mind what we’ve discussed about economic systems and opportunity cost.

32. Dreaded Disease • What would be the “market” solution to the problem? • Benefits? • Opportunity cost? • What would be the command solution to this problem? • Benefits? • Opportunity cost?

33. Dreaded Disease *80% of the children randomly affected *Preventive antidote reduces chance of death if taken before the disease strikes *No dose=90% chance of dying if contracted *1 dose= 10% chance of dying *2 doses= 8% “ “ *3 doses= 6% “ “ *4 doses= 5 % “ “ Beyond 4 doses chance of death remains at 5% 1,000 children/1,000 doses

34. Dreaded Disease Market 1-Prices on doses, buy as many as you can afford • Benefit: Buy up to 4 doses= 95% survival rate Pharm. Comp: PROFIT b. Opportunity Cost: Each child receives 1 dose= guarantees everyone 90% chance of survival

35. Dreaded Disease 2-Command Solution 1 dose for each child Benefit: guarantees every child a 90% survival Opportunity Cost: the market solution: Some families/children have a survival rate of 95%

36. Squares and Triangles PPC • Fold the table along the dashed line • Glue the two sides together. • Cut out as many squares/triangles as you can: • any combination of 10 triangles and 5 squares • Record on “All the Possibilities” sheet as we go over your results

37. 1.6What does point a represent? A combination of 70 cars and 300 units of clothing

38. What do points a, b, and c represent? Maximum combinations of output that are possible if all resources are fully employed

39. . 1.6 What does point d represent? Being outside the curve means there are no extra resources available to produce more clothing [cars yes]

40. 1.6  What does point e represent? Idle resources such as factories, land, labor strike. As long as some resources are idle, the country cannot produces along the frontier and is not realizing its full production potential

41. . 1.8 Explain what may have caused the curve to shift outward to point d. Changes that cause the PPF to expand: population growth, improvements in technology

42. Using the Guns and Butter PPF and your notes, fill out the “Production Possibilities Frontier” sheet