Trade-Off _ Opportunity Cost

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Opportunity Cost
                 Trade Off

• Definition: a giving up of one thing in return for

• All of the alternatives that we give up when we
  choose one course of action over another.

• Example: Buying a car

Trade Off - Money cannot be saved or used to buy
  other things.
  Individual Trade Offs
• Example: Spending more
  time on homework studying…

• Trade Off – Not watching
  T.V., Talking to friends,
  playing sports etc.
Business Trade Off

A CEO decides
to lay off
workers to save

The desire to
make more
money is driving
is the trade off?
Society Trade Offs

• “Guns or Butter”

• If a society decides
  to produce more
  military goods
  (guns), it will have
  fewer resources to
  produce consumer
  goods (butter).
         Opportunity Cost

• Definition: The most desirable alternative given up
  as the result of a decision.

Example: For a consumer with a fixed income, the
  opportunity cost of buying a new dishwasher
  might be the value of a vacation trip never taken or
  several suits of clothes that could not be bought.
 Thinking at the Margin
• Definition: Deciding whether
  to do or use one additional
  unit of some resource.
 Example: Wake up 1 hour
 early, get a C; wake up 2 hours
 early and get a B; 3 hours
 early and get an A.
      Define and give an
 example of each…Page
• Variable cost
• Fixed cost

• Total cost

• Marginal cost

• Incentive

• Wage

• Salary
    What is the Purpose?

 The Purpose of the Law of Diminishing Returns is
  to measure how efficient a business is making a
  product, not necessarily how much of the product
  they make?

 Is there a difference between output and

If I assigned you the task of creating a booklet of
   information and gave you the following
   instructions…how many people would be needed to
   EFFICIENTLY complete the task?

      You are to take two pieces of paper, each with
       printed information about the C&E Course, sort
       them into piles, staple them together and then
       stack them in a pile.
 Law of Diminishing Return

 Level of production in which the
 marginal product of labor
 decreases as the number of
 workers increase
 Marginal Product of Labor - The "marginal
  product" of labor (MPL) is defined as the change in
  total product from expanding labor input by one
  unit while holding capital constant.

 The "law of diminishing returns"
  states that adding additional
  amounts of labor to a fixed amount
  of capital will eventually reduce
  labor’s marginal product.
  Locate these points on
        the chart

 Efficiency

 Underutilization

 Maximization of output
                                  Marginal Product of
Labor (# of Workers)     Output
         0                 0               -
         1                 4              4
         2                 10             6
         3                 17             7
         4                23              6
         5                28              5
         6                 31             3
         7                32               1
         8                 31             -1
 Fixed Costs

         Do not change regardless of how many goods are

                 Fixed interest rate

 Variable Costs

         Costs that vary when the amount of products that
          are produced change

                 Variable interest rates

 Total Costs

         Add the variable and fixed together

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