Fundamental Questions

1. What are opportunity costs? Are they part of the economic way of thinking?

2. What is a production possibilities curve?

3. How are specialization and opportunity costs related?

4. Why does specialization occur?

5. What are the benefits of trade?

Teaching Objectives

The unique features of this chapter include the illustration of opportunity costs with an example students can readily understand-college tuition and the tradeoff between attending college and working. The chapter also uses the idea of relative opportunity costs among countries to motivate the discussion of comparative advantage, specialization, and trade.

The concepts that warrant special coverage are opportunity costs and comparative advantage, both of which are key to economic thinking. Also, the production possibilities curve is the first application of graphs to an economic problem, so draw carefully.

Key Term Review

opportunity costs
tradeoff
marginal
marginal cost
marginal benefit
production possibilities curve (PPC)
marginal opportunity cost
comparative advantage

Lecture Outline and Teaching Strategies

1. Opportunity Costs

Opportunity costs are the highest-valued alternative that must be forgone when a choice is made.

1.a. The opportunity cost of going to college: The opportunity cost of going to college is the money income forgone during four years of study.

Teaching Strategy: Try to start your lecture by asking the students to list all their costs of going to college on a sheet of paper. Then ask if anyone included the cost of not working for four years.

1.b. Tradeoffs and decisions at the margin: Economists believe that people make decisions by comparing costs and benefits at the margin.

Teaching Strategy: Ask your students to compare the costs and benefits of attending class. Point out to them that, since they are in class, the marginal benefit of attending class must have outweighed the marginal cost.

1.c. The production possibilities curve: The production possibilities curve describes the nature of social choices between alternatives.

Teaching Strategy: The production possibilities curve is usually the first model that is introduced in an economics course. Consequently, you should develop it carefully and be certain to explain the assumptions that underlie the model.

1.c.1. Points inside the production possibilities curve: These points represent underutilized resources.

1.c.2. Points outside the production possibilities curve: These points are unattainable given the resources of the economy.

1.c.3. Shifts of the production possibilities curve: The PPC shifts if a nation obtains more resources.

Teaching Strategy: Point out that the PPC can also shift when there is a technological improvement that allows for a more efficient use of the nation's resources.

2. Specialization and Trade

Specialization affects the shape of the PPC curve.

2.a. Marginal opportunity cost: This is the amount of one good or service that must be given up to obtain one additional unit of another good or service.

Teaching Strategy: Marginal opportunity costs can be related to your students' experience, for example, if they buy a shirt, they cannot buy shoes or a tie with the same money.

Teaching Strategy: Note that marginal opportunity costs will increase as resources that are in specialized uses are reallocated to other uses.

Explain what it means for the PPC curve to be a straight line.

2.b. Specialize where opportunity costs are lowest: Scarce resources must be allocated where they can best perform the job.

2.b.1. Trade: Trade occurs because countries find that it is mutually beneficial to specialize in goods in which they have a comparative advantage and trade for the other goods.

Teaching Strategy: Students usually have trouble with comparative advantage and trade. This is not because the ideas are inherently hard to understand, but because there is a lot to keep track of. Work through an example and give them one to do on their own.

2.c. Comparative advantage: This is the ability of one person or nation to do something with a lower opportunity cost than another.

2.d. Specialization and trade occur everywhere: Specialization according to comparative advantage followed by trade allows everyone to acquire more of the goods they want.

Ask your students why a professor who is good at fixing cars might still prefer to take his automobile to a garage for a tune up.