OPPORTUNITY

COST
 Opportunity Cost

• People often think of cost in terms of money.

• To an economist, cost means more than the
price tag on a good or service.
• Economists think broadly in terms of
opportunity cost, the value of the next best
alternative given up.
 Opportunity Cost

• Whenever a choice is made, something is

given up.
• The opportunity cost of a choice is the
value of the best alternative given up.
• Choices involve trading off the expected
value of one opportunity against the
expected value of its best alternative.
 Opportunity Cost

• The evaluation of choices and opportunity costs is

subjective; such evaluations differ across
individuals and societies.
• Choices made by individuals, firms, or government
offi cials often have long-run unintended
consequences that can partially or entirely offset
the initial effects of their decisions.
Exercise: When your alarm went off, what choice did
you face this morning?
Alternatives Get up Now Don´t get up
now/get up later
Benefits

Action taken
(Alternative chosen)

Opportunity Cost
(Alternative not taken)

Benefits Refused
Exercise 2:
Alternatives Going to Prom Trip to Europe
Benefits

Action taken
(Alternative chosen)

Opportunity Cost
(Alternative not taken)

Benefits Refused
PRODUCTION
POSSIBILITIES CURVE
PPC
Production Possibilities Curve PPC

• The production possibilities curve or the Production

possibilities Frontier, is used to illustrate all possible
combinations of output.

• It´s a diagram that represents various combinations

of goods and services an economy can produce
when all its resources are effi ciently used.
Production Possibilities Curve PPC
 Productive Efficiency

• The PPC is drawn on the assumption that all

resources are fully and effi ciently employed.

• Any point on the PPC shows effi cient production

(Productive effi ciency).

• Any point inside the PPC shows ineffi cient

production or unemployed resources.

• Any point outside the PPC is currently unobtainable.

The Choices
Consumers
Make • There are always alternatives
and costs to everything that
we do.

• Choices can be made by

society as a whole, or by
individuals in the society.
TRADE - OFFS
Making the right decision, from a
limited group of alternatives, it not
always easy.

Every decision we make has its trade-

off s, or alternative choices that are
given up in favor of the choice we
select.
ECONOMIC GROWTH
ECONOMIC GROWTH
Economic Growth occurs when a
nation´s total output in goods and
services increases over time.
Economic growth is important for
two reasons:

• Because of Scarcity, everybody

wants more goods and services
than they have now.
• If the population is growing,
there will be even more people
wanting goods and services to
satisfy their wants and needs in
the future.
 Economic
Growth Requires • This is the dilemma of opportunity costs
Risks and that everyone faces.

Sacrifices

• No one knows exactly how to answer this

questions, which is why there is the element
of risk.
• However, we do know what will happen if
nothing is done today – and that is very little
growth and progress.
DESCRIBING
ECONOMIC GROWTH
The easiest way to show
economic growth is to use the
production possibilities curve or
PPC.
Over time changes may cause the
production possibilities curve to
expand.
The population may grow, the
stock of capital may expand,
technology may improve or
productivity may increase.
Economic growth, made possible by having more
resources or increase productivity, causes the
production possibilities curve to expand outward.
 Shifters of the PPC

1. Change in the quantity of quality of

resources.

2. Change in technology

3. Specialization and trade

 PRODUCTIVITY

• The measure of the

amount of output
produce in a specific
time period with a given
amount of resources;
normally refers to labor,
but can apply to all
factors of production.
 • A major contribution to
THE productivity comes from
IMPORTANCE investments in human capital,
the sum of people´s skills,
OF THE abilities, health, knowledge,
HUMAN and motivation.
CAPITAL
 Division of Labor and Specialization
• The division of labor and
Specialization can also improve
productivity.
• Division of labor is a way of
organizing work so that each
worker or work group completes
a separate part of the overall
task. A worker who performs a
few task many times a day is
likely to be more proficient than a
worker who performs many
different task in the same period.
 Division of Labor and Specialization
• The division of labor has another advantage: it makes
specialization possible.
• Specialization assignment of task to the workers, factories,
regions or nations that can perform them most effi ciently.
• Takes place when factors of production perform only tasks
they can do better or more effi ciently than others
 Economic Interdependence
• Increases in productivity due to the division of labor and
specialization have another consequence: economic
interdependence.
• This means that we rely on others, and others rely on us, to
provide most of the goods and services we consume.
• So, economic interdependence, is a mutual dependence of
the economic activities of one person, company, region, or
nation on those of another person, company, region or
nation.
• As a result, events in one part of the world often have a
dramatic impact elsewhere.
 Circular Flow of Economic Activity.
• The circular flow diagram is an illustration used to show how
markets connect people and businesses in the economy. The
key feature of this circular flow is the Market.

• Market is a meeting place or mechanism through which

buyers and sellers of an economic product come together;
may be local, regional, nation, or global.
Circular Flow of Economic Activity.