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Chapter 2

Chapter 2. Choice, Opportunity Costs and Specialization Economics, 7th Edition Boyes/Melvin. Opportunity Cost. Opportunity cost : the value of the highest-valued alternative that must be forgone when a choice is made. It is the evaluation of a trade-off .

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Chapter 2

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  1. Chapter 2 Choice, Opportunity Costs and Specialization Economics, 7th Edition Boyes/Melvin

  2. Opportunity Cost • Opportunity cost: the value of the highest-valued alternative that must be forgone when a choice is made. It is the evaluation of a trade-off. • Marginal benefits and costs: the benefits and opportunity costs associated with one additional unit of the good.

  3. Opportunity Costs and Concerts You’ve just won a free ticket to see a Madonna concert. U2 is performing on the same night. Tickets to see U2 cost $75. On any given day, you would be willing to pay up to $100 to see U2. Based on this information, what is the opportunity cost of seeing Madonna? (a) $0, (b) $25, (c) $75, or (d) $100.

  4. Opportunity Costs The opportunity cost of seeing Madonna is the total value of everything you must sacrifice to attend her concert - namely, the value to you of attending the U2 concert. That value is $25 - the difference between the $100 that seeing his concert would be worth to you and the $75 you would have to pay for a ticket.

  5. Decision Making • Principle: Decision making involves trade-offs. • A trade-off means a sacrifice--giving up one good or activity in order to obtain some other good or activity .

  6. Production Possibilities Curve • The production possibilities curve shows the maximum quantity of goods and services that can be produced when the existing resources are used fully and efficiently.

  7. Production Possibilities Only defensegoods produced Defense Goods A1 200 G1 Impossible B1 175 150 Efficient Combinations C1 F1 125 Underutilized (Inefficient) 100 Only nondefense goods produced 75 D1 E1 0 150 125 25 50 75 100 Nondefense Goods

  8. Growth • The PPC moves outward (growth occurs) as the result of: • Increased resources • Larger labor force • Change in labor force participation • Chance in labor-leisure decision • Improved technology (innovation) • Expansion of capital stock • An improvement in the rules (laws, institutions, and policies)of the economy

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