Chapter 1.2: Opportunity Cost

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Bell Ringer

• Think of a recent decision you made and what was the alternative decision you could have chosen.

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Trading time!

• Take out the product you brought from home

• Must trade with at least two people• Can’t end up with your own product • Time to trade!

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Trade-offs

Trade-offs involve things easily measured: money, property or time.

Trade-off The act of giving up one benefit to gain another, greater benefit.

But often they involve values that are hard to measure:• Enjoyment• Job satisfaction• Feeling of well-being

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Trade-offs

• Individuals and trade-offs– Give me examples

• Businesses and trade-offs– Give me examples

• Governments and trade-offs– Give me examples – “Guns or butter”- The choice between

spending money on military or domestic needs

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Determining Opportunity Cost

• We always have to make decisions and make trade-offs.

• Of all our trade-offs, one of those rejected alternatives is more desirable than the rest. This is known as the “opportunity cost” (definition to come)

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Opportunity Cost

Think of opportunity cost as the value of what you are giving up…not what you are giving up.

Opportunity Cost The most desirable alternative given up as the result of a decision

The benefits you could have received from the other action is the O.C.

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Opportunity Cost

Opportunity Costof

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Opp cost examples• A student decides to quit her job so she can go to senior

week. – What is trade-off– What is the opportunity cost?

• A college student “got turnt up” instead of studying for a final.– What is the trade-off?– What is the opportunity cost?

• A man decides to mow his lawn instead of watching

football with his friends.– What is the trade-off?– What is the opportunity cost?

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Opp cost examples

• A gardener decides to grow carrots in her garden.– What is the opportunity cost?

• A billionaire donates unused land for a town to build a waterpark.– What is the opportunity cost?

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Art time!!

• Seeing we are all artists in here, please show me your rendition of opportunity cost, 1st grade style.

• Draw pictures, captions, thought bubbles etc. to show us what opportunity cost is. Make sure that we are able to understand what was given up and what was selected.

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Paper folding activity

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Thinking at the Margin

Many decisions involve adding or subtracting one unit – one hour, one dollar

Thinking at the marginDeciding whether to do or use one additional/less unit of some resource

From an economist’s point of view, when you decided how much to fold the paper, you were “thinking at the margin”

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Cost/Benefit Analysis

• Deciding by “thinking at the margin” is just like making any other decision

• When we make decisions we think of the opportunity costs and the benefits- what we will sacrifice and what we gain from our decision.

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Cost/Benefit Analysis

We always want to make the best decision – that’s what we are programmed to do!

Cost/benefit analysisA decision-making process in which you compare what you will sacrifice and gain by your action

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• Marginal Cost- The extra cost of adding one unit

• Marginal Benefit- The extra benefit of adding one unit