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Opportunity Costs

Opportunity Costs. Scarcity & Opportunity Cost. Because of scarcity, we must make choices With any choice, there are costs & benefits. The Big Idea. Opportunity Cost is the value of any alternative that you must give up when you make a choice. It is the value of the opportunity lost.

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Opportunity Costs

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  1. Opportunity Costs

  2. Scarcity & Opportunity Cost • Because of scarcity, we must make choices • With any choice, there are costs & benefits

  3. The Big Idea • Opportunity Cost is the value of any alternative that you must give up when you make a choice. • It is the value of the opportunity lost

  4. Comparative vs. Absolute Advantage • Comparative Advantage: The ability to produce something at a lower opportunity cost than other producers • Absolute Advantage: The ability to produce something using fewer resources than other producers

  5. What this means for companies & countries? • An individual, firm or country with the lowest opportunity cost of producing a good should specialize in that good

  6. Examples • Books or Movies • Should LeBron James cut his own lawn?

  7. LeBron • LeBron James is both a great basketball player (who chokes at times) and a great lawn mower. However, LeBron has a young neighbor named Scotty who is willing to mow his lawn. • LeBron can mow his lawn in two hours. He could also film a Nike commercial in two hours and make $10,000. So, James' opportunity cost is??? • Neighbor Scotty can mow LeBron's lawn in four hours. He could also work at McDonald's for four hours and make $8 per hour. So, Scotty's opportunity cost of mowing LeBron's lawn is ???

  8. Big ?’s • Who has an absolute advantage? • Who has a comparative advantage? • Should LeBron & Scotty make a trade? Can both benefit from the trade?

  9. Other examples of this: • We should specialize in what we're good at and trade with others for other things we want. Such a rule explains why: • 1. We generally don't grow our own food. • 2. Basketball or football players often specialize in one position as opposed to playing all of them. • 3. Your teacher may teach economics, history, and government but likely does not also teach physical education and chemistry.

  10. Big picture ?’s • Should a country produce everything it wants? • If Country A is better than Country B at producing everything, would Country A gain anything by trading with Country B? • When a new home is built, why doesn’t one contractor do everything?

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