Fundamental Economic Concepts

Fundamental Economic Concepts Economic Choices and Decision Making Unit One, Lesson Three

Trade-Offs • People face trade-offs, or alternative choices, whenever they make an economic decision. • If I have $15, I can get a CD, or I can get 8 songs on itunes • My parents have $30,000—they can send me to small, private, prestigious school for a year or buy me a nice new SUV

Opportunity Costs • An opportunity cost is the value of a forgone opportunity—the what you have to give up when you make a decision. • Most people hear cost and think that it can only be dollars and cents, but costs can be more than a price tag. • Ex: what will it cost you to study for 5 hours tonight?

Opportunity costs • Utility maximization comes into play here---you will do what costs you less • Part of economics is the idea that people, when behaving rationally, will do what they get the most benefit from and that costs them the least. • Of course, utility is different for each person, so our decisions will be different.

Opportunity Costs • Ex: What is your opportunity cost to go to college next year and start your degree? What are you giving up? What would you gain? • What would the opportunity cost be for Angelina Jolie (who did not attend college) to quit her job and go back to school next year? What would she be giving up? What would she gain?

Opportunity Costs • This is why most movie and rock stars don’t go to school once their career begins. The costs would outweigh the benefits. • By staying in the acting business, Angelina is maximizing her utility—getting the most usefulness or satisfaction from her scarce resource (time)

Economic Decision Making • We all have scarce resources • This scarcity requires us to make choices • Based on our opportunity costs • We will do what gives us the most benefit and costs us the least • This results in utility maximization

Fundamental Economic Concepts