Trade-Off

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Trade-Off Opportunity Cost
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Trade Off

• Definition a giving up of one thing in return
  for another
• All of the alternatives that we give up when we
  choose one course of action over another.
• Example Buying a car
• Trade Off - Money cannot be saved or used to buy
  other things.

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Individual Trade Offs

• Example Spending more time on homework studying
• Trade Off Not watching T.V., Talking to
  friends, playing sports etc.

4
Business Trade Off

• A CEO decides to lay off workers to save money.
• The desire to make more money is driving the
  decisionWhat is the trade off?

5
Society Trade Offs

• Guns or Butter
• If a society decides to produce more military
  goods (guns), it will have fewer resources to
  produce consumer goods (butter).

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Opportunity Cost

• Definition The most desirable alternative given
  up as the result of a decision.
• Example For a consumer with a fixed income, the
  opportunity cost of buying a new dishwasher might
  be the value of a vacation trip never taken or
  several suits of clothes that could not be
  bought.

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Thinking at the Margin

• Definition Deciding whether to do or use one
  additional unit of some resource.
• Example Wake up 1 hour early, get a C wake up
  2 hours early and get a B 3 hours early and get
  an A.

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Define and give an example of eachPage 153-154

• Variable cost
• Fixed cost
• Total cost
• Marginal cost
• Incentive
• Wage
• Salary

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LAW OF DIMINISHING RETURNS
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What is the Purpose?

• The Purpose of the Law of Diminishing Returns is
  to measure how efficient a business is making a
  product, not necessarily how much of the product
  they make?
• Is there a difference between output and
  efficiency?

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Hypothetically????

• If I assigned you the task of creating a booklet
  of information and gave you the following
  instructionshow many people would be needed to
  EFFICIENTLY complete the task?
• You are to take two pieces of paper, each with
  printed information about the CE Course, sort
  them into piles, staple them together and then
  stack them in a pile.

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• Law of Diminishing Return
• Level of production in which the marginal product
  of labor decreases as the number of workers
  increase

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• Marginal Product of Labor - The "marginal
  product" of labor (MPL) is defined as the change
  in total product from expanding labor input by
  one unit while holding capital constant.
• The "law of diminishing returns" states that
  adding additional amounts of labor to a fixed
  amount of capital will eventually reduce labors
  marginal product.

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Locate these points on the chart

• Efficiency
• Underutilization
• Maximization of output

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Example
Labor ( of Workers) Output Marginal Product of Labor
0 0 -
1 4 4
2 10 6
3 17 7
4 23 6
5 28 5
6 31 3
7 32 1
8 31 -1
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• Fixed Costs
• Do not change regardless of how many goods are
  produced
• Fixed interest rate
• Variable Costs
• Costs that vary when the amount of products that
  are produced change
• Variable interest rates
• Total Costs
• Add the variable and fixed together