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

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Economic decision making scarcity and choice

Economic Decision Making-Scarcity and Choice

Opportunity Costs

Marginal Analysis

Production Possibilities


Economic decision making scarcity and choice

  • 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


Economic decision making scarcity and choice

  • 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.


Economic decision making scarcity and choice

  • 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.


Economic decision making scarcity and choice

  • 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.


Economic decision making scarcity and choice

  • 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.


Economic decision making scarcity and choice

  • 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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