• 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
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
money is driving
is the trade off?
Society Trade Offs
• “Guns or Butter”
• If a society decides
to produce more
(guns), it will have
fewer resources to
• 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
LAW OF DIMINISHING
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
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
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
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
Do not change regardless of how many goods are
Fixed interest rate
Costs that vary when the amount of products that
are produced change
Variable interest rates
Add the variable and fixed together