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Economic Choices and Decision Making
1.3
ADAM SMITH
• "It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own self-interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages."
Adam Smith (again)
• Every individual “intends only his own gain, and he is in this… led by an invisible hand… By pursuing his own interest he frequently promotes that of society…”
• Competition acts as an “invisible hand” that guides resources to their most productive uses.
• A truly competitive market – operating with a minimum of government intervention – would bring about the greatest good for society as a whole.
• Explain this idea of an invisible hand.• Why did Smith’s ideas appeal to business
owners?
A picture of the Invisible Hand
Become a Good Decision Maker
• Trade-offs: alternative choices made in an economic decision
• Opportunity Cost: the cost of the next best alternative use of money, time, and resources when one choice is made rather than another.
• More in-depth: http://www.reffonomics.com/TRB/chapter1/opportunitycost.swf
• Scenario: You have a general $100 gift certificate for the mall. How are you going to spend it? With a partner, make a grid of the criteria that will go into your decision…
Criteria
Alternatives
cost durability
utility Etc.
Shoes
CD’s
Etc.
Example Trade-Off Grid
Opportunity cost—After school
• What did you do yesterday after school? Look at the opportunity costs of your decisions.
• Also, explain how your decision will or will not affect your friends and members of your family.
• You decide that you are going out to eat tonight with others. What factors go into:– Where you’re going to eat?– Who you are going with?– What you’re going to eat?– How you’re going to pay for
it?
• What are your opportunity costs of making your ultimate choice over the next best options?
Production Possibilities• Production Possibilities frontier – a diagram representing
various combinations of goods and/or services an economy can produce when all productive resources are fully employed.
•What is the opportunity cost of scoring a 75% on the calculus test?
The most famous PPF example
MILITARY V. CIVILIAN
A Two-Product Farmer’s Possible PPF
• Why is the yellow area inefficient production?• Why is the white area unattainable production?• What would have to happened to move into the white area?
1
Different countries: labor v. capital
Cost of War in Iraq
From nationalpriorities.org
> $600 billion (Feb 2009)
Possible Opportunity Costs:
>90 million kids attending head start programs
>193 million people w/ health care for 1 year
>10.7 million additional teachers for 1 year
>5.1 million additional housing units
>101 million full 1 year university scholarships
The “Cost of War in Iraq” slide is an example of what kind of
PPF?
1
op i n i on
Cost-Benefit Analysis
• A way of thinking about a problem that compares the costs of an action to the benefits received