Chapter 1: Economics: The study of opportunity cost

CHAPTER 1 ECONOMICS: THE STUDY OF OPPORTUNITY COSTCHAPTER OUTLINEECONOMICS AND OPPORTUNITY COSTMODELING OPPORTUNITY COST USING A PRODUCTION POSSIBILITIES FRONTIERATTRIBUTES OF THE PRODUCTION POSSIBILITIES FRONTIERDEMONSTRATING CONSTANT AND INCREASING OPPORTUNITY COSTTHINKING ECONOMICALLYEconomics and Opportunity CostEconomics: the study of the allocation and use of scarce resources to satisfy unlimited human wantsChoices Have ConsequencesOpportunity CostThe forgone alternative of the choice madeOrWhat you would have done had you not done what you did. Modeling Opportunity Cost Using a Production Possibilities FrontierDefinitionsPPF: a graph which relates the amounts of different goods that can be produced in a fully employed societyModel: a simplification of the real world that we can manipulate to explain the real worldSimplifying Assumption: an assumption that may, on its face, be silly but allows for a clearer explanationScarce: not freely available and infiniteResources: anything we either consume directly or use to make things that we will ultimately consumeFigure 1 Production Possibilities Frontier: The Starting PointSPSodaPizza0Figure 2 PPF: Moving Pizza Chefs to Their Rightful Place SPSodaPizza0XFigure 3 PPF Moving to Even More Pizza ProductionSPSodaPizza0XYFigure 4 All Points on a Production Possibilities FrontierSPSodaPizza0XYZMFigure 5 A Fully Labeled Production Possibilities Frontier: The Case When People are DifferentSPSodaPizza0XYZMUnemploymentAttainableUnattainableFigure 6 A Fully Labeled Production Possibilities Frontier: The Case When People are the SameSPSodaPizza0XYZMUnemploymentAttainableUnattainableIncreasing and Constant Opportunity CostIncreasing Opportunity CostExists when the additional resources required to produce an additional unit grows as more output is produced.Likely to occur when people are different in their skills.Constant Opportunity CostExists when the additional resources required to produce an additional unit remains the same as more output is produced. Likely to occur when people are identical in their skills.Figure 7 Illustrating Increasing Opportunity CostPizzaSoda0 1 2 3OC01OC12OC23Production Possibilities FrontierFigure 8 Illustrating Constant Opportunity CostPizzaSoda0 1 2 3OC01OC23OC12Production Possibilities FrontierThinking EconomicallyMarginal AnalysisOptimization Assumption: an assumption that suggests that the person in question is trying to maximize some objectiveMarginal Benefit: the increase in the benefit that results from an actionMarginal Cost: the increase in the cost that results from an actionNet Benefit: the difference between all benefits and all costsPositive and Normative AnalysisPositive Analysis: a form of analysis that seeks to understand the way things are and why they are that wayNormative Analysis: a form of analysis that seeks to understand the ways things should beEconomics IncentivesIncentive: something that influences the decisions we makeExamples: prices influence the amount we buy; taxes influence how much we work and saveLogical FlawsFallacy of Composition: the mistake in logic that suggests that the total economic impact of something is always and simply equal to the sum of the individual partsCorrelation = Causation: the mistake that suggests that because two variables are correlated that one caused the other to happen.