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Trade-Offs and Opportunity Cost

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					Trade-Offs and
Opportunity Cost

Chapter 1
 Every economic decision involves trade-
  offs.

 Trade-offs are the alternative choices
  people face in making an economic
  decision.
 Opportunity cost is the cost of the next
  best alternative choice. The opportunity
  cost is the money, time or resources a
  person gives up, for the final choice.
Question

 What is the
  opportunity cost of
  the War in Iraq?
Production Possibilities
Frontier
              The Production
              Possibilities frontier
              diagram illustrates
              opportunity cost. It
              shows the
              combinations of goods
              and/ or services that
              can be produced when
              all productive
              resources are used.
 The line of the graph represents the full potential
  (aka frontier) of economy employing all
  productive resources.
 Uses of the Production Possibilities Diagram:
  Identifying possible alternatives to putting the
  best resources into production
 Idle resources lead
  to failure to reach full
  production potential.

 Economic growth
  (more resources,
  larger labor force,
  increased
  productivity) creates
  a new frontier.

				
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