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Academic Economics Chapter 1, Section 2

 Choices drive an economy, and people look for three things when they make choices:  Incentives – benefits offered to encourage people to act certain ways  Utility – the usefulness of something  The desire to economize – make decisions according to what you believe is best combo of costs and benefits. **Every choice involves a cost –  “There is no such thing as a free lunch.”  “Choosing is refusing”

 Exchanging (choosing) one thing for the use of another is called a trade-off.  Trade-offs involve opportunity costs, or the loss of the next best alternative when you choose another.  Considering the opportunity cost of a decision can help people make decisions.

 The value of the next best alternative, the “cost” of choosing one thing over another.  Ex. the opportunity cost of studying Fri. night might be missing the football game.

 Trade-off:  Name given to the next best alternative (thing you could do)  Opportunity cost:  The value of that next best alternative VS

 This idea of trade-offs and opportunity cost gives us an idea of what we should spend our time doing…among other things  So…why shouldn’t he? Why Superman should not save cats

 In order to figure out whether something is “worth doing”, we can do a cost/benefit analysis.

From “Fight Club” – Narrator: A new car built by my company leaves somewhere traveling at 60 mph. The rear differential locks up. The car crashes and burns with everyone trapped inside. Now, should we initiate a recall? Take the number of vehicles in the field, A, multiply by the probable rate of failure, B, multiply by the average out-of-court settlement, C. A times B times C equals X. If X is less than the cost of a recall, we don't do one.

 Consider the following situation:  Your grandmother needs a procedure to save her life. She is 94 years old, and has been in good health up to this point. But the procedure will cost YOU $15,000 and there is a 33% failure rate. ▪ What will you decide?

 Practice with opportunity cost and trade-offs