Economics:Unit I

Productivity & Making Choices

Questions for focus[standards SSEF1 & 2]

• What does resource allocation mean?• What is a trade-off?• What is opportunity cost?• How do people make rational decisions when

confronted with scarcity?• What is a cost-benefit analysis? (rational decision benefits>/= costs)• What is a production possibilities curve?

Resource allocation• How people or

governments determine who gets what

• US $$$, China government decides

• Traditional systems (Native tribes): trade (barter)

Trade-off•Choices people must make when faced with scarcity

Opportunity cost• The cost of the next-best alternative use of money,

time or resources

Vacation or car payments/insurance/upkeep?

$1500 to spend

How do you make rational decisions when confronted with scarce resources?

• How do you decide how you spend your money?• More satisfaction? Highest/best return?

How would you spend $1000?

Cost-benefit analysis• Comparing the cost of an action to the benefits

Jeans vs. soccer cleatsYou have $300 to spend.

You’re a soccer player and you need new cleats (your old cleats are worn out). You’re also a student, and you need new jeans for school (for the same reasons).

• What do you do?• Reasons to buy the cleats:• Reasons to buy the jeans:• How can you get both? Is

there some kind of compromise?

Rational decision making• A rational decision is when the benefits outweigh or are equal to the

costs. (This can be subjective!)• Classic example: “guns” vs. “butter”• Which is more important? Security/protection, or education/health

care/roads/consumer products?• Cost benefit analysis: can these issues be analyzed in terms of $?

Production possibilities curve