Chapter 1.2: Opportunity Cost

1. Chapter 1.2: Opportunity Cost

2. Bell Ringer • Think of a recent decision you made and what you had to give up as a result.

3. Trading time! • Take out the product you brought from home • Must trade with at least two people • Can’t end up with your own product • Time to trade!

4. Trade-offs Trade-offs involve things easily measured: money, property or time. • But often they involve values that are hard to measure: • Enjoyment • Job satisfaction • Feeling of well-being Trade-off The act of giving up one benefit to gain another, greater benefit.

5. Trade-offs • Individuals and trade-offs • Give me examples • Businesses and trade-offs • Give me examples • Governments and trade-offs • Give me examples • “Guns or butter”- The choice between spending money on military or domestic needs

6. Determining Opportunity Cost • We always have to make decisions and make trade-offs. • Of all our trade-offs, one of those rejected alternatives is more desirable than the rest. This is known as the “opportunity cost” (definition to come)

7. Opportunity Cost Think of opportunity cost as the value of what you are giving up…not what you are giving up. Opportunity Cost The most desirable alternative given up as the result of a decision The benefits you could have received from the other action is the O.C.

8. Opportunity Cost Opportunity of Cost

9. Opp cost examples • A student decides to quit her job so she can go to senior week. • What is the trade-off? • What is the opportunity cost? • A college student “turns up” instead of studying for a final. • What is the trade-off? • What is the opportunity cost? • A man decides to mow his lawn instead of watching football with his friends. • What is the trade-off? • What is the opportunity cost?

10. Opp cost examples • A gardener decides to grow carrots in her garden. • What is the opportunity cost? • A billionaire donates unused land for a town to build a waterpark. • What is the opportunity cost?

11. Art time!! • Seeing we are all artists in here, please show me your rendition of opportunity cost, 1st grade style. • Draw pictures, captions, thought bubbles etc. to show us what opportunity cost is. Caution! Don’t show just show what the trade-off is!

13. Paper folding activity

14. Thinking at the Margin Many decisions involve adding or subtracting one unit – one hour, one dollar From an economist’s point of view, when you decided how much to fold the paper, you were “thinking at the margin” Thinking at the margin Deciding whether to do or use one additional/less unit of some resource

15. Cost/Benefit Analysis • Deciding by “thinking at the margin” is just like making any other decision • When we make decisions we think of the opportunity costs and the benefits- what we will sacrifice and what we gain from our decision.

16. Cost/Benefit Analysis We always want to make the best decision – that’s what we are programmed to do! Cost/benefit analysis A decision-making process in which you compare what you will sacrifice and gain by your action

17. Marginal Cost- The extra cost of adding one unit • Marginal Benefit- The extra benefit of adding one unit