T R A D E - O F F S A N D O P P O RT U N I T Y C O S T

L E C T U R E 2

W H AT I S O P P O R T U N I T Y C O S T ?

• In short, Opportunity Costs are the benefits you sacrifice when you make a choice.

• Sleep vs. Study - what is the cost of sleeping in later vs getting up to study?

F E L D M A N ’ S S E L F - S E R V I C E B A G E L B U S I N E S S

• Why did Feldman set up his business this way?

• What were the opportunity costs?

• What were his incentives?

F E L D M A N ’ S T R A D E - O F F

SELF-SERVICE •  More time to do other things

•  Implies trust in the customers

•  Don’t have to pay or train employees

•  Don’t have to worry about employee theft

•  More locations and therefore more income

TRADITIONAL

• Get 100% of the revenue • Provide customer service • Workers perform essential functions • Can provide more goods and services and provide a deeper experience • Building customer relationships is easier

T R A D E - O F F A N A LY S I S• Economic models assume that

individuals are rational.

• People can rank their preferences from high to low, or best to worst

• People never purposely choose to make themselves worse off.

• If expected benefits are greater than expected costs for a given choice, it is in the agent’s best interest to make that choice.

T H E R E I S N O S U C H T H I N G A S A F R E E L U N C H

• There is always a cost associated with everything. Even if the lunch is “free” for you, someone paid a cost to grow the food and make the lunch for you.

• Because of this, we know nothing is truly free.

• Since nothing is free, we are forced to make choices about how we distribute and acquire resources.

Opportunity cost at the national levelNational  economies  must  decide  on  a  combination  of  goods  and  services  to  meet  the  demands  of  their  citizens.    

When  an  economy  is  operating  at  full  capacity  a  production  possibilities  frontier  or  limit  can  be  created.  This  curve  is  useful  in  demonstrating  the  concept  of  opportunity  cost  as  it  demonstrates  that  the  only  way  to  produce  something  new  is  to  give  up  the  production  of  another  item.    

The  most  popular  example  of  this  used  is  the  model  of  guns  vs.  butter.  

Guns vs. Butter(s)•The  relationship  between  the  allocation  of  national  production  of  guns  and  butter  are  inversely  connected.  Assuming  total  production  stays  constant,  as  production  of  guns  increases,  production  of  butter  decreases  and  vice  versa.    

If  the  maximum  production  capability  of  a  national  economy  is  increased,  then  the  production  possibilities  frontier  (curve)  can  be  pushed  outward  allowing  for  more  total  production  of  goods.  This  can  only  occur  when  the  factors  of  production  (Land,  Labor,  Capital  and  Entrepreneurship)  increases  and/or  improves.  

T W O T H I N G S W E A L L M U S T D O

• In life, we must do two things:

• 1. Make Choices

• 2. Live with the consequences

S U M M A R Y

•  Economics:  Science  of  Choice  and  the  alloca0on  of   scarce  resources  

•  Scarcity:  unlimited  wants  vs.  limited  supply  

•  Trade-­‐off:  best  2  choices  

•  Incen3ves:  posi0ve  benefits/reason  for  doing  something  

•  Opportunity  Cost:  benefits  sacrificed  

•  Nothing  is  free  because  everything  has  a  cost