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Making Decisions: Understanding Opportunity Costs and Trade-offs

Learn about the concept of opportunity costs and trade-offs in decision-making, and how to analyze and evaluate the benefits and costs of different choices. Explore the impact of these trade-offs on individuals, businesses, and society.

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Making Decisions: Understanding Opportunity Costs and Trade-offs

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  1. Chapter 1 Section 2: Opportunity Costs

  2. Trade offs • Alternatives that we give up whenever we choose one course of action over another • Individuals & trade offs • Every decision involves a trade off

  3. Businesses & trade offs • Decisions that business people make about how to use land, labor, & capital resources also creates trade offs

  4. Society & trade offs • Guns or butter • A country that decides to produce more military goods has fewer resources to devote to consumer goods & vice versa

  5. Defining Opportunity Cost • Most desirable alternative given up as a result of a decision • Every ordinary decision that we make everyday involves an opportunity cost

  6. Using a decision making grid • Can help you determine whether you are willing to accept the opportunity cost of a choice you are about to make

  7. Karen’s Decision-making Grid Alternatives Sleep late Wake up early to study Benefits • Enjoy more sleep • Have more energy during the day • Better grade on test • Teacher and parental approval • Personal satisfaction Decision • Sleep late • Wake up early to study for test Opportunity cost • Extra study time • Extra sleep time Benefits forgone • Better grade on test • Teacher and parental approval • Personal satisfaction • Enjoy more sleep • Have more energy during the day • Economists encourage us to consider the benefits and costs of our decisions.

  8. Making the decision • With each new situation, the opportunity costs & benefits change • We always face opportunity costs • When we select one alternative, we have to sacrifice at least one alternative & forgo its benefits • By recognizing what we are sacrificing, we can decide whether the decision is worth it

  9. Opportunity Cost: the foregone alternative Think: “next-best”

  10. What’s scarce when you’re in the Mall of America? at the all-you-can-eat buffet? Scarcity IS: Even in the face of abundance . . .

  11. Opportunity Cost Analysis What was the 1st decision you made this morning?

  12. Opportunity Cost Analysis Decision Maker: YOU

  13. Opportunity Cost Analysis Decision Maker: YOU More sleep

  14. Opportunity Cost Analysis Decision Maker: YOU More sleep X

  15. Opportunity Cost Analysis Decision Maker: YOU

  16. Thinking at the Margin • Many decisions involve adding one unit or subtracting one unit

  17. Making a decision at the margin • When you decide how much more or less to do, you are thinking at the margin.

  18. Cost & benefit at the margin • Such a comparison could help someone decide how much money to spend on a car, how many hours to work, & how much time to spend watching TV

  19. Cost/Benefit Analysis • Decision makers just have to compare the opportunity costs & the benefits • What they will sacrifice & what they will gain • Once the opportunity cost outweighs the benefits, no more units should be added

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