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Opportunity Cost The opportunity cost of a choice is the value of the next- best alternative given up when that choice is made. Opportunity Cost Simulation Economics Models Economists use modeling to simplify reality. Models help to focus on selected aspects of the real world by stripping away nonessential details. Economics Models • • • • • Uses of models include: Describing relationships Forecasting economic activity Proposing economic policy Presenting reasoned arguments to justify policy Planning and allocation Commonly described as establishing argumentative framework for applying logic and mathematics Creating Economic Models The Production Possibilities Frontier A production possibilities frontier, or PPF, is a curve that shows the maximum quantity of one good that can be produced for each possible quantity of another good produced. Efficiency and Growth An economy is efficient if there is no opportunity to make someone better off without making anyone else worse off. Opportunity Costs for Society Opportunity Costs for Society The law of increasing opportunity cost states that the opportunity cost of a good rises as more of the good is produced. Efficiency and Growth Economic growth is an increase in the ability to produce goods and services over time. Microeconomics Macroeconomics The study of how people make decisions and how those decisions affect others In the economy. The study of the economy as a whole. Microeconomics Example Topics: - Profits - Markets - Pollution Macroeconomics Example Topics: - Inflation - Interest rates - Government spending Positive Economics Normative Economics Positive economics is the study of what the world is like and why it works the way it does. It is about facts and cause- and- effect relationships. Normative economics is the study of the way things should be rather than the way things are. Normative economics brings opinions and ideals into the process of answering questions. Positive questions include: • How many teenagers live in poverty? • Do people buy more or less Coke when their incomes increase? Normative questions include: • Should our country do more to help the poor? • Should college athletes be paid to perform?