chapter 1
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Chapter 1. Section 2: Opportunity Costs. 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. Businesses & trade offs - PowerPoint PPT PresentationTRANSCRIPT
Chapter 1
Section 2: Opportunity Costs
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
• Businesses & trade offs–Decisions that business people make about how to use land, labor, & capital resources also creates trade offs
• 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
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
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
• Economists encourage us to consider the benefits and costs of our decisions.
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
Sleep late Wake up early to study
Alternatives
Karen’s Decision-making Grid
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
Opportunity Cost: the foregone alternative
Think: “next-best”
SCARCITY IS: EVEN IN THE FACE OF ABUNDANCE . . .
What’s scarce when you’rein the Mall of America?at the all-you-can-eat buffet?
Opportunity Cost Analysis
What was the 1st decision you made this morning?
Opportunity Cost Analysis
Alternatives: Get Up Now Don’t Get Up Now
Perceived Benefits
Choice
Opp. Cost
Benefits Refused
Decision Maker: YOU
Opportunity Cost Analysis
Alternatives: Get Up Now Don’t Get Up Now
Perceived Benefits
Shower bkfst don’t rushOn time coffee
Choice
Opp. Cost
Benefits Refused
Decision Maker: YOU
More sleep
Opportunity Cost Analysis
Alternatives: Get Up Now Don’t Get Up Now
Perceived Benefits
Shower bkfst don’t rushOn time coffee
Choice XOpp. Cost
Benefits Refused
Decision Maker: YOU
More sleep
X
Opportunity Cost Analysis
Alternatives: Get Up Now Don’t Get Up Now
Perceived Benefits
Shower bkfstCoffee don’t rushOn time
Choice XXOpp. Cost XX
Benefits Refused
More sleep
Decision Maker: YOU
Thinking at the Margin
• Many decisions involve adding one unit or subtracting one unit
Making a decision at the margin
• When you decide how much more or less to do, you are thinking at the margin.
Options
1st hour of extra study time
2nd hour of extra study time
3rd hour of extra study time
Benefit
Grade of C on test
Grade of B on test
Grade of B+ on test
Opportunity Cost
1 hour of sleep
2 hours ofsleep
3 hours of sleep
Options
1st hour of extra study time
2nd hour of extra study time
3rd hour of extra study time
Benefit
Grade of C on test
Grade of B on test
Grade of B+ on test
Opportunity Cost
1 hour of sleep
2 hours ofsleep
3 hours of sleep
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
• 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