economic decision making scarcity and choice
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Economic Decision Making -Scarcity and Choice. Opportunity Costs Marginal Analysis Production Possibilities. An economic decision involves making a choice of how to allocate (“divide-up”) limited or scarce resources. The fundamental building blocks of economic decision-making:

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economic decision making scarcity and choice

Economic Decision Making-Scarcity and Choice

Opportunity Costs

Marginal Analysis

Production Possibilities

slide2
An economic decision involves making a choice of how to allocate (“divide-up”) limited or scarce resources.
  • The fundamental building blocks of economic decision-making:

(i) Opportunity Cost

(ii) Marginal Cost-Benefit Analysis

opportunity costs
Opportunity Costs
  • The opportunity cost of an activity is the value of the next best alternative which is foregone or sacrificed.
  • A well functioning market implies that goods that have high (low) opportunity costs also have high (low) monetary costs.
  • Examples:

- Job Offers and Salaries

- Natural Resource Depletion

- Time Value of Money

slide4
An interest rate is

(i) the rate by which a bank account grows over time.

(ii) the price borrowers pay lenders for a loan.

(iii) the opportunity cost of holding cash rather than depositing it into a bank account.

marginal analysis cost benefit principle
Marginal Analysis: Cost-Benefit Principle
  • Marginal benefit is the benefit of one additional unit of an activity.
  • Marginal cost is the cost of one additional unit of an activity.
  • Cost-Benefit Principle: An individual or society should take action if the marginal benefits of doing it exceed the marginal costs.
slide6
Example: Study Time and Grades

Total Time Available = 4 hours

Activities: Studying or Leisure (partying)

Benefit of Leisure (0 to 10)

Cost of Lower Grade (0 to 10)

Net Happiness = Benefit - Cost

production possibilities
Production Possibilities
  • The production of output requires inputs or the factors of production. The most common inputs are labor and raw materials such as land and capital.
  • A production possibilities frontier (PPF) shows possible (feasible) combinations of goods which can be produced by a given amount of resources.
slide8
Example – Software Company
  • Remarks about PPF:

(i) Points inside or along PPF are feasible.

(ii) Points outside PPF are unattainable.

(iii) Points along PPF are efficient.

  • Efficiency in economics means that you cannot increase production of one good without sacrificing the production of another.
slide9
The PPF is

(1) Downward-sloping

(2) Usually bowed-out – the principle of increasing opportunity costs.

  • The principle of increasing (opportunity) costs: As the production of one good expands the opportunity cost of the other good sacrificed increases.
slide10
Cases where increasing costs may not apply.
  • What causes the PPF to shift outward?

(i) Growth in resources (inputs).

(ii) Technological progress/human capital.

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