1.2 ~ Opportunity Costs

What is Opportunity Cost?

the value of the next best alternative that is forgone when making a decision

• Choice

• eg. time

What do you consider when Making CHOICES?

1. Benefits must outweigh the costs

2. Rational Decision making

What is Self-Interest in Decicion Making?

 choices you make that you think are best for you

What is Social Interest in Decision Making?

choices that are best for society as a whole

What are Incentives?

rewards and penalties for choices and you are more likely to choose actions with rewards and avoid actions with penalties

What is a Free Good?

Any good that isn’t scarce

• Anything that can be obtained without sacrificing something else

• Free goods have zero opportunity cost

• There goods are rare

• Consumers can obtain all they want of these goods at no charge

• Ex. air, sunlight

Types of Free Goods?

1. Public Goods (provided by the government

   • Produced by scarce resources and paid by our taxes (opportunity cost)

2. Common Pool Resources

   • Certain natural resources not owns by anyone by becomes scarce due to overuse and depletion

   • eg. clean air, forests, fish

What is an Economic Good?

 any good that is scarce

• Can be naturally occurring

• Can be produced by scarce goods

• All economic goods have an opportunity cost greater than zero

• Most goods are economic goods

What is a “trade-off”?

For every good a nation produces, it faces a “trade-off” in terms of some other good it can no longer produce

• This is because production of goods is limited by the amount of resources that exist (labour, capital and materials)

Three Basic Economic Questions

1. WHAT?

   • All must decide what particular good or service to produce and in what quantities

2. HOW?

   • All must decide how to use their resources in order to produce goods and services

3. FOR WHOM?

   • All must make choices about how the goods and services produced are to be distributed among the population

For whom to produce? (3)

1. Distribution of Output

   • How much of what is produced do different individuals or groups of individuals in the population receive

2. Distribution of Income

   • The amount of output people get depends on how much of it they can buy

   • This, in turn, depends on how much income they have

3. Redistribution of Income:

   • When the distribution of income our output changes so that different social groups now receive more, or less, income and output

Market Method

Involves a private sector where resources are owned by private individuals or groups. Decisions are made by consumers and firms responding to prices determined in markets, about what, how, and for whom to produce.

Command Method

Involves a public sector where resources, particularly land and capital, are owned by the government. Decisions are made by commands from the government about what, how, and for whom to produce.

Mixed Economies

Real-world economies that combine elements of both market and command methods. The global trend is towards less government intervention, resulting in more reliance on market forces.

Economic System