OPPORTUNITY COSTS

People’s choices involve costs

Use of scarce resources can be costly so tradeoffs must be made

Opportunity Cost – the highest value alternative that must be Sacrificed as the result of choosing an option - “What you lose when you choose”If I didn’t go to Mt Lemmon this

weekend I would have gone out to dinner with my husband

Think of an example of an opportunity cost and write it down

TANSTAAFL

There Ain’t No Such Thing As A Free Lunch

Use of a resource to produce a pair of jeans diverts it from another use

Going to school is free of charge but it is not free

Individuals choose purposefully

Economizing behavior – choosing the option that offers the greatest benefit at the least possible cost

Purposeful or rational decision makingGoing out to dinner – you don’t

choose the most expensive option unless it gives you more pleasure

If there were 3 dinner specials that all cost $15, you would choose the one that you like best

In your notes

Write down a non food example of economizing behavior

Opportunity Cost1. What is the opportunity cost of getting

married? All the other people you could be dating

2. The OC of government fixing the roads is the labor and materials.

False3. The OC of hiring police officers is funding

an after school arts program. True

4. The OC of coming to school are the wages you could earn working at a job.

True

Opportunity costs for women - 1945

Laundry by hand (4 hrs washing, 41/2 ironing

Now - washing 41 minutes, 1 ¾ hrs ironing

Opportunity cost much higher to work outside the home in 1945 so less women did it

Todd recently purchased his own car on credit. He works at a part-time job at an auto-wrecking firm to earn the money he needs to make payments on his new car. Lately, his work in school has declined. When his teacher asked him if he was studying for the tests, he replied, “Not really. I’d like to study more, but I have no choice. I’ve got to keep working to pay off my car loan.”

Describe situations where you may have felt you had no choice. For example:

“I have to put gas in the car so I can get to work

tonight.”Write example in your notes.

A. What was Ashley’s problem?

B. What alternatives did Ashley have?

C. What were the costs of each alternative?

D. What were the benefits?

Utility – benefit or satisfaction a person expects from a choice or course of action

Cost/Benefit Analysis: comparison of what you will sacrifice and gain by a specific action

Marginal Cost: the extra cost of adding one unit

Marginal Utility: the extra benefit of adding one unit

Marginal Revenue (benefit) = Marginal Cost

Costs

Explicit costs – out of pocket expensesThe price of the movie ticket

Implicit costs – the value of resources that could have been used elsewherePay you would have earned if you had

gone to work rather than gone to the movies

– making the decision for 1 more “how much” is a decision at the margin

 What should I do for the next hour?At what mileage should I change the oil?

Production Possibilities Frontier – understand the trade offs