o pportunity cost. d efinitions consequence – something that logically or naturally follows from...
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OPPORTUNITY COST
DEFINITIONS
Consequence – something that logically or naturally follows from an action or condition. For example, if you stay out past your curfew, you will be grounded.
Opportunity Cost – the best alternative that is forgone because a particular course of action is pursued. For example, buying an expensive iPod Nano means you'll have less money to spend on fun weekend activities.
DEFINITIONS
Trade-off – an exchange of one thing in return for another, especially relinquishment of one benefit or advantage for another regarded as more desirable. For example, you want both a new outfit and a new and a class ring. You forgo the outfit for something that will last longer.
Decision-making – process by which consumers identify their needs, collect information, evaluate decisions and make or act on a decision. For example, you are going to purchase a car. First, list your needs (get to school, practice, must be safe, reliable, affordable, etc.); then you shop around (on Internet, in car dealerships, etc.); list the pros and cons to each car you find; buy your car. Explain how tradeoffs are associated with decision-making.
EXAMPLE 1
Tennis coach might videotape a tennis player's stroke and then study it frame by frame
JIM IS ABOUT TO PURCHASE A CD OF HIS
FAVORITE SINGER
Benefit -- hours of pleasure from listening to them
Cost -- price tag it costs $15
Alternatives
Listen to radio
Download song
Borrow CD
Determine if the benefits exceed the cost
WOMAN WALKING ALONG THE STREET WHEN SHE SEES A $1
BILL ON THE SIDEWALK. SHOULD SHE PICK IT UP?
Benefit -- $1 richer
Cost – 0 dollars
Alternative – What if the woman is Madonna, and she is hurrying to a recording studio where a symphony orchestra is waiting to perform with her
Determine if the benefits exceed the cost
Do something if it’s benefits outweigh its opportunity costs.
TO CALCULATE IT ASK YOURSELF THREE
QUESTIONS
1. What alternative opportunities are there?
2. Which is the best of these alternative opportunities?
3. What would I gain if I selected my best alternative opportunity instead of the choice I'm considering?
JIM IS ABOUT TO PURCHASE A CD OF HIS
FAVORITE SINGER
Benefit -- hours of pleasure from listening to them
Cost -- price tag it costs $15
Alternatives (other ways to spend the $15)
Sunglasses
CONSIDER A GOVERNMENT PROPOSAL
TO BUILD A NEW DAM
Here's how a poor decision-maker might view the problem
"If we build a dam, we'll have better flood control and cheaper electricity.
If we don't, then we'll experience occasional flooding, and electricity will be more expensive."
HERE'S ANOTHER WAY OF PRESENTING THE
PROBLEM:
"If we build the dam, it will provide us with flood control and cheaper electricity, but it will cost us $100 million."
HERE'S HOW AN ECONOMIST WOULD VIEW
THE PROBLEM:
"If we build the dam, we'll have flood control and cheaper electricity. But the $100 million to build the dam could be used instead to build two new high schools."
OPPORTUNITY COST OF GOING TO A
MOVIE
Time to do homework: 3 hoursGas and parking: $1.50Admission to the theater: $2.00_______________________________________
Opportunity Cost: 3 hours and $3.50