Opportunity Cost Chapter 1

Every time we choose to do something, we give up the opportunity to do something else

Trade-offs The act of giving up one benefit in order to gain another, greater benefit Individuals, businesses, and large groups of people, including governments, make decisions that involve trade-offs Money, property, time, values, enjoyment, job satisfaction, or feeling of well-being

Individual trade-offs At every stage of life, you have to make trade- offs

Business trade-offs Decisions that businesses make about how to use their factors of production involve trade-offs

Government trade-offs National, state, and local governments also make decisions that have trade-offs “Guns or Butter”—decision to spend money on military or domestic needs

Why do we have trade-offs Scarcity

Determining opportunity costs The most desirable alternative somebody gives up as the result of a decision is the opportunity cost

Choosing is refusing We always face opportunity costs When we select one alternative, we must sacrifice at least one other alternative and its benefits

Thinking at the margin When economists look at a decision, they point out one more characteristic in addition to opportunity cost Many decisions involve adding or subtracting one unit One hour One dollar When you decide how much more or less to do, you are thinking at the margin

Folding a paper The question is, how many folds is the best number for fitting easily into your pocket and laying flat once in your pocket

Cost/benefit analysis Decision makers have to compare the opportunity costs and the benefits What they will sacrifice and what they will gain The decision-making process is called cost/benefit analysis Weigh marginal costs against marginal benefits Marginal cost—extra cost of adding one unit Marginal benefit—extra benefit of adding one unit As long as the marginal benefit exceed the marginal costs, it pays to add more units