## Jesses Decision Making Grid

 Alternatives Criteria Costs \$50 or less? Durable? Will parents approve? Future expense unnecessary? Can use anytime? Several CDs yes yes yes yes no Concert tickets yes no no no no Cassette player yes yes yes no yes Soccer ball yes yes yes yes no Jeans yes yes yes yes yes

Adapted from A Framework for Teaching Basic Economics, Economics America National Council on Economic Education, 1996

Adapted from A Framework for Teaching Basic Economics, Economics America National Council on Economic Education, 1996

Using Tables A decision-making grid is a good way to list and then evaluate alternatives when a decision must be made. What do economists mean when they talk about costs?

20 UNIT 1 FUNDAMENTAL ECONOMIC CONCEPTS

CONTENTS

Economic Choices

Trade-Offs In this cartoon, the king faces a trade-off between crops and catapults. What is the opportunity cost of obtaining two more catapults?

### Production Possibilities

A popular model economists use to illustrate the concept of opportunity cost is the production possibilities frontier, a diagram representing various combinations of goods and/or services an economy can produce when all productive resources are fully employed. In the classic example shown in Figure 1.6, a mythical country called Alpha produces two goods—guns and butter.

### Identifying Possible Alternatives

Even though Alpha only produces two goods, the country has a number of alternatives available to it. For example, it could choose to use all of its resources to produce 70 units of guns and 300 units of butter, which is shown as point a in Panel A. Or, it could shift some of its resources out of gun production and into butter, thereby moving to point b. Alpha could even choose to produce at point c, which represents all butter and no guns, or at point e, which is inside the frontier.

Alpha has many alternatives available to it, which is why the figure is called a production "possibilities" frontier. Eventually though, Alpha will have to settle on a single combination such as point a, b, or any other point on or inside the curve, because its resources are limited.

### Fully Employed Resources

All points on the curve such as a, b, and c represent maximum combinations of output possible if all resources are fully employed. To illustrate, suppose that Alpha is producing at point a and the people would like to move to point d, which represents the same amount of guns, but more butter.

As long as all resources are fully employed at point a, however, there are no extra resources available to produce the extra butter. Therefore, point d cannot be reached, nor can any other point outside the curve. This is why the figure is called a production possibilities "frontier"-to indicate the maximum combinations of goods and/or services that can be produced.

CHAPTER 1: WHAT IS ECONOMICS? 21

CONTENTS

Making Choices The nation incurs opportunity costs when it makes choices. The money spent on defense cannot at the same time be spent on health services; money spent on health services cannot be spent on education, and so on. Why does every choice involve an opportunity cost?

### Opportunity Cost

Suppose that Alpha was producing at point a and that it wanted to move to point b. This is clearly possible so long as point b is not outside the frontier. As shown in Panel B, the opportunity cost of producing the 100 additional units of butter is the 30 units of guns given up.

As you can see, opportunity cost is a general concept that is expressed in terms of trade-offs, or in terms of things given up to get something else. Opportunity cost is not always measured in terms of dollars and cents. For example, you need to balance the time you spend studying and doing

### 22 UNIT 1 FUNDAMENTAL ECONOMIC CONCEPTS

homework and spending time with your friends. If you decide to spend extra hours on your homework, the opportunity cost of this action is less time with your friends.

### The Cost of Idle Resources

If some resources were not fully employed, then it would be impossible for Alpha to reach its potential. To illustrate, suppose that Alpha was producing at point b in Panel A when workers in the butter industry decided to go on strike. Butter production would fall, causing total output to change to point e. The opportunity cost of the unemployed resources would be the 100 units of lost butter production.

Production at e could also be the result of other idle resources, such as factories or land that are available but are not being used. As long as some resources are idle, the country cannot produce on its frontier-which is another way of saying that it cannot reach its full production potential, although it can produce at some point inside it.

### Economic Growth

The production possibilities frontier represents potential output at a given point in time. Eventually, however, population may grow, the capital stock may grow, and productivity may increase. If this happens, then Alpha will be able to produce more in the future than it can today.

The effect of economic growth is shown in Panel C of Figure 1.6. Economic growth made possible by having more resources or increased productivity causes the production possibilities frontier to move outward. Economic growth will eventually allow Alpha to produce at point d, which it could not do earlier.

Student Web Activity Visit the Economics: Principles and Practices Web site at epp.glencoe.com and click on Chapter 1—Student Web Activities to learn more about what economists do.

Student Web Activity Visit the Economics: Principles and Practices Web site at epp.glencoe.com and click on Chapter 1—Student Web Activities to learn more about what economists do.

### Thinking Like an Economist

■A Because economists study how people satisfy seemingly unlimited and competing wants with the careful use of scarce resources, they are also concerned with strategies that will help us make the best choices. Some of these strategies are discussed here; others will be discussed in later chapters.

### Build Simple Models

One of the most important strategies of economists is the economic model. A model is a simplified theory or a simplified picture of what something is like or how something works. Simple models can often be constructed that reduce complex situations to their most basic elements. To illustrate, the circular flow diagram in Figure 1.3 is an example of how complex economic activity can be reduced to a simple model.

Another basic model is the production possibilities frontier illustrated in Figure 1.6. Realistically, of course, economies are able to produce more than two goods or services, but the concepts of trade-offs and opportunity costs are easier to illustrate if only two products are examined. As a result, simple models such as these are sometimes all that economists need to analyze or describe an actual situation.

It is important to remember that models are based on assumptions, or things that we take for granted as true. We use them as facts even though we can't be sure that they are. For example, you might assume that a restaurant is out of your price range. You might not even try it because you assume you cannot afford it. However, you might be wrong—the prices at the restaurant might be quite reasonable. The quality of a model is no better than the assumptions that it is based on.

It is also important to keep in mind that models can be revised. Economists use models to better understand the past or present and to predict the future. If an economic model results in a prediction that turns out to be right, the model can be used again. If the prediction is wrong, the model might be changed to make better predictions the next time.

 eco r NOMICS ■ Figure 1.6 AT A GLANCE

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### Responses

• yorda
What is the opportunity cost of producing one additional unit of butter at Point C?
8 years ago
• teigan
What is the opportunity cost of obtaining two more catapults?
8 years ago
• matilda
What is a decision making grid economics?
8 years ago
• fortunato
What is the oppurtunity cost of obtaining two more catapults?
8 years ago
• Sylvia
What is the opportunity cost of 70 guns and 300 butters?
4 years ago
• eric
What is the opportunity cost of obtaining two more catapults answer?
2 years ago