Economic Choices and Decision Making

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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?

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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?

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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