The Foundation of Economics

Obj: 1. Students will understand how scarcity drives all decision-making 2. Students will understand opportunity cost and how it is calculatedES: C-7 State implications and consequences of scarcity

Agenda:1. Poll Everywhere2. Scarcity Demo3. Presentation4. Opportunity Cost

Read/Sheet

HW: Mod 1 Review ?s, Opportunity Cost Sheet, Bring Scarce item

Scarcity is King• Our world is imperfect…we have unlimited wants trying to be fulfilled

using our limited resources• Why is gold valuable? Why do people value clean air/water? Time?

• THE ECONOMIC PROBLEM!!!

Trade-offs

• When decisions are made, people are always confronted with multiple alternative actions• Example: Waking up for school…

• The ultimate decision should be the most efficient, profitable outcome

Opportunity Cost

• The foregone benefit of the next best alternative when resources are used for one purpose rather than another• What you are missing out on because of the activity you chose to

partake inExample: You (or most of you) are seniors about to graduate. When August hits you will be faced with the decision to attend college or enter the workforce. You could either a) spend the $30k a year to attend a University, or b) take a job working retail in the KOP mall for $30k/ yearWhat is your opportunity cost?

Explicit and Implicit Costs

• Explicit—what you pay for something• Implicit—opportunity cost of using your own resources rather than

selling them to someone else

• Example: Cost of college???

• These 2 types of costs combined make up opportunity cost

Economic vs. Accounting Profit

Lets examine a scenario…McDonald’s manager making $80,000.00 per year decided to leave the restaurant they’re managing and open their own restaurant. In their first year as owner, they make $80,000.00

Opportunity Cost

• Explicit = rent, franchise tag, financial services, loan…

• Implicit = missing out on his regular $80,000.00 salary, time, effort

Accounting Profit Economic Profit

$80,000.00 $00.00

***accounts for time as well as financial costs

LeBron James is a Master Opportunity Cost

Attending any college in the country on scholarship to play basketball.

VS.

$13 million contract with Cleveland Cavaliers/sponsorship with Nike and Coke

So…A Kid Walks into a Candy Store with $5

• What are their choices?• Trade-offs?• Opportunity cost?• Explicit costs?• Implicit costs?• Accounting profit?• Economic profit?