Unit 2
TRADE-OFFS
Main idea: Economic decisions always involve trade-offs that have costs. Think about the last time you spent an hour watching television. Were there other ways you could have spent your time? Read on to learn about how using resources one way means giving up other alternatives.
The economic choices people make involve exchanging one good or service for another. If you choose to buy an iPod, you are exchanging your income for the right to own the iPod. Exchanging one thing for another is called a trade-off.
Individuals, families, businesses, and societies are forced to make trade-offs every time they use their resources in one way and not another.
The Cost of Trade-Offs The cost of a trade-off is what you give up in order to get or do something else. Time, for example, is a scarce resource—there are only so many hours in a day—so you must choose how to use it. When you decide to study economics for an hour, you are giving up any other activities you could have chosen to do during that time.
In other words, there is a cost involved in time spent studying this book. Economists call this an opportunity cost— the value of the next best alternative that had to be given up to do the action that was chosen. You may have many trade-offs when you study—exchanging instant messages with your friends, going to the mall, watching television, or practicing the guitar, for example. But whatever you consider the single next best alternative is the opportunity cost of your studying economics for one hour.
A good way to think about opportunity cost is to realize that when you make a trade-off (and you always make trade-offs), you lose something. What do you lose? You lose the ability to engage in your next highest valued alternative. In economics, therefore, opportunity cost is always an opportunity that is given up.
Considering Opportunity Costs Being aware of tradeoffs and their resulting opportunity costs is vital in making economic decisions at all levels. Whether they are aware of it or not, individuals and families make trade-offs every day. Businesses must consider trade-offs and opportunity costs when they choose to invest funds or hire workers to produce one good rather than another.
Consider an example at the national level. Suppose Congress approves $220 billion to finance new highways. Congress could have voted instead for increased spending on medical research. The opportunity cost of building new highways, then, is less medical research.
Production Possibilities Curve Obviously, many businesses produce more than one type of product. An automobile company, for example, may manufacture several makes of cars per plant in a given year. What this means is that the company produces combinations of goods, which results in an opportunity cost.
Economists use a model called the production possibilities curve to show the maximum combinations of goods and services that can be produced from a fixed amount of resources in a given period of time. This curve can help determine how much of each item to produce, thus revealing the trade-offs and opportunity costs involved in each decision.
The classic example for explaining production possibilities in economics is the trade-off between spending on military defense and civilian goods, sometimes referred to as guns versus butter. The extreme situation for any nation would be to use all of its resources to produce only military goods or only civilian goods. Of course, in reality, nations always produce some of both. Governments, like businesses, face production possibilities curves all of the time, so they know they have to give up production of one type of good or service in order to get more production of another.
Reading comprehension competency focus
Answering text content questions orally:
1. What do economic choices of people involve?
2. What is a trade-off?
3. What is a cost of a trade-off?
4. What do economists call an opportunity cost?
5. How are trade-offs and opportunity costs related?
6. What does an opportunity cost cause a person to lose?
7. How often do individuals make trade-offs?
8. When do businesses face trade-offs?
9. What is the difference between a trade-off and an opportunity cost?
10. What do economists use the production possibilities curve for?
11. The classic example for explaining the production possibilities curve shows the relationship between what two factors?
Recalling the facts: Fill in the blanks using the following words.
the production possibilities curve, decision, economic decisions, opportunity cost, services, a trade-off
Combining trade-offs and opportunity cost is essential in making smart 1_ ______. 2_ ______ is exchanging one thing for another. The cost of a trade-off is what you give up in order to get or do something else. 3_ ______ is the value of the next best alternative given up for the alternative that was chosen. Economists use a model called 4 _______the production possibilities curve to show the maximum combinations of goods and 5 ______ that can be produced from a fixed amount of resources in a given period of time. This curve can help determine how much of each item to produce, thus revealing the trade-offs and opportunity costs involved in each 6_ ______.
Rendering the text:
Используя ресурс определенным образом, мы упускаем возможность его использования другим способом. Выбор одного варианта действия ведет к отказу от возможности выбрать другой. Связанные с этим альтернативные издержки называются издержками неиспользованных возможностей. Данные издержки имеют место везде, где необходимо сделать выбор между вариантами. Это ключевое понятие в экономике. Оно обеспечивает наиболее эффективное использование ограниченных ресурсов.
Компании, производящие продукцию нескольких видов, знакомы с издержками неиспользованных возможностей: они принимают решение о том, какие товары производить. В такой ситуации экономисты используют кривую производственных возможностей. Эта кривая показывает, какие товары могут быть произведены компанией при использовании определенного объема ресурсов за конкретный период времени.
Answering WHY questions: Speak up your mind.
1. Why is being aware of trade-offs and opportunity costs vital in decision-making?
2. The opportunity cost is usually defined in the terms of money or time. Why?
Reviewing: Watch video “The Production Possibilities Curve”. Have you learnt anything new? Be ready to answer the following questions:
1. What economic problem does the production possibilities curve illustrate?
2. How is it plotted?
3. What do points c, d, e on the curve show?
Critical thinking (Discussion competency): Discuss the following questions in groups/pairs.
1. Do wealthy people and wealthy nations have to do with scarcity and accept trade-offs?
2. Think of two non-economic factors that small businesses might consider when deciding what products to produce.
3. Why do production possibilities curves slope down from left to right?
Interpreting cartoons: Study the cartoon and answer the questions:
1. What is a man complaining of?
2. What opportunity has he given up?
3. What is a tradeoff for him?
4. What other tradeoffs can walking upright involve?
