Opportunity Cost

Opportunity Cost In this lesson, students will be able to define the following key words and concepts: Trade-offs Opportunity Cost Guns or Butter Thinking at the Margin E. Napp

Essential Question? • EQ 2: How do economic trade-offs force industries to prioritize resources and Efficiency? E. Napp

Scarcity exists. We have endless desires but limited resources. In Economics, we must choose. E. Napp

Trade-off • A trade-off occurs when we choose one course of action over another. • In Economics, we can never have everything we want or need. • We must make choices. • A woman spends ten dollars buying her lunch at a local restaurant. She cannot use the same ten dollars to buy a book. A trade-off has occurred. E. Napp

Sometimes a society is more concerned with economic growth than environmental quality. E. Napp

It’s All About Scarcity! • Scarcity exists. Our wants and desires are limitless but our natural resources are limited. • We can always want more than we have. As such, we are constantly choosing one course of action over another. • We cannot spend ten dollars on a movie ticket and the same ten dollars on a restaurant meal. E. Napp

E. Napp

Opportunity Cost • Whenever we make a decision, we receive one thing but give other things up. • If I chose to study tonight for the examination, I cannot go to the party or the movies or walk the dog. • The most desirable alternative given up for the decision is the opportunity cost. • Think of the opportunity cost as the best course of action of all those things you didn’t get. E. Napp

Scarcity and opportunity costs affect individuals, businesses, and governments. E. Napp

Guns or Butter • Government officials also must choose where to spend tax dollars. • When a government spends more money on the military, it must invariably spend less money on consumer goods like roads and schools. • Economists refer to government trade-offs as Guns or Butter. E. Napp

The Cost of War E. Napp

Thinking at the Margin • Sometimes a decision involves whether to add or subtract one additional unit of a resource. • After studying many hours, a student might ask herself: “Should I study one more hour?” • This question is a question at the margin. • Deciding whether to add or subtract one additional unit occurs at the margin. E. Napp

Should we study one more hour? That is thinking at the margin. E. Napp

Questions for Reflection • Provide examples of trade-offs. • Why do trade-offs exist? • What is the opportunity cost? • Provide an example of an opportunity cost? • What is thinking at the margin? • Provide an example of thinking at the margin. E. Napp

Production Possibilities Graphs • In this lesson, we will examine the various options available to producers. • Students will be able to define the following terms: Production Possibilities Graph Efficiency Underutilization Production Possibilities Frontier E. Napp

Producers have options. Should a farmer grow corn or broccoli? E. Napp

A Production Possibilities Graph • A Production Possibilities Graph shows alternative ways of using a country’s or producer’s resources. • If a farmer uses more of his land to grow corn, he has less land for broccoli. • Every decision has its cost. E. Napp

What is the cost of producing more automobiles? E. Napp

Efficiency • An economy is efficient when it uses resources in such a way as to maximize production. • Why is it important to be efficient? E. Napp

Look at the graph. Where is efficiency occurring? E. Napp

Look at this graph. Where is efficiency occurring? E. Napp

Underutilization • Underutilization is the opposite of efficiency. • Underutilization occurs when an economy uses fewer resources than it is capable of using. • Why do producers avoid the underutilization of resources? E. Napp

Look at the graph. Where is underutilization occurring? E. Napp

The Production Possibilities Frontier • The line on the graph that shows the maximum possible production is called the production possibilities frontier. • At the frontier, efficiency is occurring. • However, new technology can shift the frontier. Think about it! E. Napp

Look at the graph. Where is the production possibilities frontier? E. Napp

Don’t Forget Scarcity! • A producer cannot produce everything. • A producer must make choices. • Remember: It’s all about scarcity. Our resources are limited but our wants and desires are unlimited. E. Napp

It’s all about corn or broccoli. We can’t have it all. E. Napp

Questions for Reflection: • What does a production possibilities graph show? • Define efficiency. • Why is it important to be efficient? • Define underutilization. • What problems are created by underutilization? • What is the production possibilities frontier? E. Napp

Opportunity Cost