Opportunity Cost

Scarcity

• The most basic economic problems• People want more then there is.– Resources are limited– Wants are unlimited

Examples of Scarcity• Money: Want to go see a movie?– You have $10.00, but the movie costs $10.50

• Time: Finish homework and play video games before bed– Once you finish your homework, it is time to

get ready for bed. • Ran out of time for games.

• Resources: Countries, like the U.S., want to spend $ on resources- education and health.– Instead need to use $ for roads and defense.

• Pot hole season!

Businesses and Scarcity

• Must make many decisions:– which goods and services to make.– How much of a product to make.

• Do not have enough resources to do everything they want.

• Can make more then one product, but it costs more.

Can you think of an example of scarcity?

Making Choices

• Why do we have to choose between two options?– Because our wants and needs are bigger then our

resources• How do you choose? (milk or cookie?)– Economics is the study of how people and

governments make these choices.

Trade-Off

• Resources– Are scarce– Can only be used one way at a time

• Pencil- I can use it to write, OR I can use it to style my hair. I cannot do both at the same time.

• Land- Owner can use it to farm corn, OR golf course.• Money- Buy a friend dinner, OR buy a new video game.

• You cannot use the same resource (pencil, land, money), at the same time, for different things.

Trade-off

• In a Trade-off, you give up one thing for another.– The trade off for buying the basketball is you will

not be able to take your friend out.

– VS.

1. Who makes Trade-offs?

• Everyone makes trade-offs!– Individuals: Should I watch this movie or play my

video game?– Businesses: Should I use this land to farm corn, or

to use as a golf course?– Government: Should we use this money to fix the

roads, or give it to schools?

2. Why do decisions lead to trade-offs?

• Decisions lead to trade-offs because…– You can use resources only one way at a time• This means you can’t have it both ways!• Remember the song by the Rolling Stones

– "You can't always get what you want"

Opportunity

• Each possible use of a resource is an opportunity.

• Every time we make a choice we give up an opportunity to do something else.– I will make pasta sauce with

my tomato…– Guess I can’t make salsa

today.

• What are the opportunities for using a Tomato– Soup– Pasta Sauce– Sandwich– Salad– Salsa– etc

Opportunity Cost

• The cost of something is how much it is worth.• Those tomatoes cost $5.00

• Opportunity Cost is the cost of giving up the other choice.– The next best (2nd best) choice not taken• Salsa is the opportunity cost of me deciding to make

pasta sauce.

3. Why are opportunity costs different for each possible choice?

• Each opportunity has many choices• The 2nd best choice of each decision is the

opportunity cost, which will change with every decision you make.

6. What is the difference between a trade-off and an opportunity cost?

• A trade-off is the act of choosing one thing over another.– I will use the tomato to make pasta sauce.

• Opportunity cost is the 2nd best choice that you have given up because of the trade-off made.– I have given up the opportunity to make…

Thinking at the Margin:

• Folding paper:– Fold your paper in half one time.– How many times do you need to fold the paper so it

will,• Fit in pocket of pants• lay flat in pocket (no one can see it)

• How many more times do you need to fold the paper?

• How many less times did some of you need to fold the paper?

Cost/Benefit Analysis

• When making a decision, you have to look at what you may be giving up by picking something and what you may be getting.– Pros- would be the benefits of your choice.

– Cons- would be the cost of your choice.

Cost/Benefit chart: Pasta sauce vs. other options (salsa).

Benefit/Pro Cost/Con

7. What is the purpose of a cost/benefit analysis?

• A cost/benefit analysis will…• help determine (find out) what you will gain

(benefit) and lose (cost) by taking a specific action.

• Benefit- I get to eat pasta• Cost- I can’t have salsa

4. What do you compare when you think at the margin?

• When you think at the margin, you compare…– marginal cost with marginal benefit.

Marginal Cost vs. Marginal Benefit

Marginal Cost• Extra cost of making one

more of something• What if I wanted to make

ONE more pan of pasta sauce?– What is the Cost?

Marginal Benefit• Extra benefit of adding one

more of something.• What if I wanted to make

ONE more pan of pasta sauce?– What is the benefit?

5. How can thinking at the margin help improve profits?

• Businesses can look at the point where the marginal benefit is higher then the marginal cost– This is the point where businesses will make the

most money.– If Marginal Cost is higher then the Marginal

Benefit then companies lose money.