Trade Offs and Opportunity Costs

ECONOMICS TOPIC 1 LESSON 2

Opportunity Cost and Trade-Offs

ESSENTIAL QUESTIONS

How does economics affect everyone?

Making Decisions

• •Individual Decisions

• •Business Decisions

• •Government Decisions

trade-off

Economists point out that all individuals, businesses, and large groups of people—even governments—make decisions that involve trade-offs. A trade-off is the act of giving up one benefit in order to gain another, greater benefit.

Individual Decisions

At every stage of life, you have to make trade-offs.

Business Decisions

The decisions that businesses make about how to use their factor resources—land, labor, and capital—also involve trade-offs.

Government Decisions

National, state, and local governments also make decisions that involve trade-offs. Economists and politicians use the term “guns or butter” to describe one of the common choices facing governments: the choice between spending money on military or domestic needs.

Open Ended

DEFINE What are trade-offs?

Multiple Choice

Identify Main Ideas Why do individuals, businesses, and governments make trade-offs?

• to make more money

• because resources are limited

• because large groups of people cannot easily make decisions

• to promote their values

Opportunity Cost

• •Using a Decision-Making Grid

• •Making the Decision

Using a Decision-Making Grid

At times, the opportunity cost of a decision may be unclear or complicated. Using a decision-making grid can help you determine whether you are willing to accept the opportunity cost of a choice you are about to make.

Open Ended

Analyze Charts What would you do if you were Karen? Why?

Making the Decision

After considering the opportunity cost of each alternative, choose the most desirable benefit. 

Multiple Choice

Check Understanding Which statement best describes opportunity cost?

• Opportunity cost is the value in dollars of a trade-off.

• Opportunity cost is the best choice in a decision.

• Opportunity cost is the best alternative decision.

• Opportunity cost is all the alternatives not chosen in a decision.

Thinking at the Margin

From an economist’s point of view, when you decide how much more or less to do, you are thinking at the margin.

Open Ended

Karen decides to wake up two hours earlier to study with the expectation of raising her grade to a B. Analyze Charts Do you agree with that decision? Why or why not?

Analyzing Costs and Benefits

eciding by thinking at the margin is just like making any other decision. Decision makers have to compare the opportunity costs and the benefits—what they will sacrifice and what they will gain. This decision-making process is sometimes called cost/benefit analysis.

Multiple Choice

Apply Concepts In which of these situations would a manufacturer decide to produce more units?

• The marginal cost is greater than the marginal benefit.

• The marginal cost is less than the marginal benefit.

• The marginal benefit is less than the marginal cost.

• The marginal benefit is equal to the marginal cost.

Open Ended

How does economics affect everyone?