Chapter 1.3 notes

1. Chapter 1.3 notes

2. Trade-Offs and Opportunity Cost • Trade-offs – alternative choices people face in making an economic decision. • Opportunity cost – the cost of the next best alternative among a person’s choices. The money, time, or resources a person gives up, or sacrifices, to make his final choice.

3. Production Possibilities • production possibilities frontier – diagram illustrates opportunity cost. It shows the combinations of goods and/or services that can be produced when all productive resources are used. • Identifying alternatives allows an economy to examine how it can best put its limited resources into production.

4. PPF allows an economy to analyze the combination of goods and services that makes maximum output • Economic growth caused by more resources, larger labor force or increased productivity causes a new frontier for the economy.

6. How could the PPF expand as shown?

7. Thinking like an Economist • Building simple models helps economists analyze or describe actual situations • Cost-benefit analysis – compares the costs of an action to the benefits received. • Small incremental steps helps economists test whether the estimated cost was correct.

8. Macroeconomics • Is the study of the behavior of the economy as a whole and involves topics like inflation, unemployment, aggregate demand, aggregate supply.

9. Microeconomics • Is the study of the behavior of individual players in an economy - individuals, families, and businesses • Includes prices, costs, profits, competition and the behavior of the consumers and producers.