Economics

Ch 1, Sec. 2 – Opportunity Cost

Trade-off

• An alternative that we sacrifice when we make a decision

Guns or butter

• A phrase that refers to the trade-offs that nations face when choosing whether to produce more or less military or consumer goods

Opportunity cost

• The most desirable alternative given up as the result of a decision

Thinking at the margin

• Deciding whether to do or use one additional unit of some resource

Why must the opportunity cost of a decision always be something desirable?

• An opportunity cost must be desirable because there would be no meaningful decision to be made between a desirable option and an undesirable.

What is involved in a “guns or butter” decision?

• “Guns or butter” refers to whether a country chooses to produce more military goods (“guns”) or more consumers goods (“butter”).

What does it mean to “think at the margin”?

• “Thinking at the margin” means making a decision about how much more or less to do. It allows people to evaluate options based on available resources.

Economics, Ch 1, Sec 3

Production Possibilities Curves

Production possibilities curve

• A graph that shows alternative ways to use an economy’s resources

Production possibilities frontier

• The line on a production possibilities graph that shows the maximum possible output

Underutilization

• Using fewer resources than an economy is capable of using

Cost

• To an economist, the alternative that is given up because of a decision

Efficiency

• Using resources in such a way as to maximize the production of goods and services

Law of increasing costs

• Law that states that as we shift factors of production from making one good or service to another, the cost of producing the second item increases

How is underutilization depicted on a production

possibilities frontier?

• Underutilization is shown by any point that appears inside the production possibilities frontier

How does a production possibilities curve illustrate

the efficiency of an economy?

• A production possibilities curve shows the maximum possible output along the production possibilities frontier. If a country’s economic production is on the frontier, the economy is producing at top efficiency

How does a production possibilities curve illustrate

opportunity cost?

• Opportunity cost can be illustrated by comparing the data at various points on the production possibilities frontier. As production of one element increases, the curve shows the decrease in production of the other element: opportunity cost.

Illustrate the impact of a drought on a production possibilities

curve for farm goods.

Illustrate the impact of the invention of new technology on a production possibilities curve

for factory goods.