Opportunity Cost and Production Possibilities Curve Thinking at the Margin

1. CH. 1, SECTION 2 & 3
Opportunity Cost & Production Possibilities
Curve

2. Key Terms
• Trade-off
• Opportunity Cost
• At the Margin

3. You should know
1. Describe why every decision involves trade-offs.
2. Explain the concept of opportunity cost.
3. Explain how people make decisions by thinking at the
margin.

4. • Trade-off: Exchanging one thing for another
Example: Money for skittles
• Society and Trade-offs: military spending vs. consumer
goods. (guns vs. butter)

5. Opportunity Cost: The value of the next best alternative
• Example: Cost of the m&m’s you didn’t choose.
• Example: President and Homeland Security, where could
that money be going?

6. “Choosing is refusing.”
(when making a choice, you are giving up something else)
*Because of scarcity, opportunity cost must be taken into
consideration.

7. Thinking at the Margin
Thinking about using one additional unit.
• Decisions are not always black and white, yes or no. You
have varying options in consideration of time, money, etc.
Example: 3 hours of time
• 3 hours studying, 0 hours sleeping
• 1 hour studying, 2 hours sleeping
• 2 hours studying, 1 hour sleeping
• 0 hours studying, 3 hours sleeping

8. Cost and Benefit at the Margin
Options Benefit Opportunity Cost
1st hour of extra study time C on the test 1 hour of sleep
2nd hour of extra study
time
B on the test 2 hours of sleep
3rd hour of extra study
time
B+ on the test 3 hours of sleep

9. Production Possibilities Curve
Production Possibilities: The combo of G&S that can be
produced given:
• A fixed amount of resources
• A given period of time

10. Production Possibilities Curve
Guns vs. Butter
B
Point A: Best use (efficient)
Point B: Underutilization
Point C: Best use (efficient)
A
C

11. Shift in the curve:
More resources available, shifts
out
Less resources available, shifts
in

12. Efficiency – PP curve assumes you are operating at the most
efficient level
Any point inside the line indicates an underutilization of
resources.
Growth – The entire production possibilities shifts out.
Cost – the alternative we give up when we choose one option
over the other. (opportunity cost)
Law of increasing costs – as production switches from one
item to another, more and more resources are necessary to
increase production of the second item.

13. Assignment
1. Create your own production possibilities curve.
• Label the two axis (NOT guns vs. butter)
• Explain your curve and the choices you will have to
make in at least two sentences.
• Show, label, and explain two shifts in the curve
• Show, label, and explain two points. (one on the curve
and one off)