Scarcity & Opportunity Costs Pgs 2 – 4 Chapter 1.1 Scarcity & Opportunity Costs Pgs 2 – 4

Scarcity Make a list of 10 items you’d like to buy, try to pick items that are around $20. Why can’t you have all of these items? Not enough money? Why do they cost $20 in the first place? Come to think of it, why is gold so valuable? Diamonds? There is only so much stuff… and we all want, well all of it…

Opportunity Cost Okay, let’s go back to our lists. If I gave you the $20 (I’m not going to but we’ll pretend), what would you buy? If you didn’t buy that what would you have bought? That is your opportunity cost. In econ terms this is the next best alternative. And what about the other items on your list? Are they opportunity cost as well? NO!!!!! It’s only the one next item.

Cont. Every choice has its own opportunity cost. Let’s sum it up: Since we can’t have everything we want (scarcity), And we have to make choices Which means we have to give something up (Opportunity cost), How am I supposed to make up my mind?

Cost Benefit Analysis If you want to know if you’re making a good choice measure the costs against the benefits. The more utility you get out of a decision the better it is. Utility – usefulness or satisfaction Let’s look at an example!

Cost/Benefit Analysis How should you spend your first hour if you want to maximize your total score for both classes? Cost/Benefit Analysis Economics Math Hrs. Study Score 1 58 63 2 73 79 3 85 89 4 91 93 5 95 96 6 98 99 7 100 +58 +6 +4 +3 +2 +15 +12 MB/MC +63 +4 +3 +1 +16 +10 MB/MC Marginal Benefit = the benefit of one more hour of study Marginal Cost (opportunity costs) = Cost of one more hour of study Marginal Benefit > Marginal Cost = best choice

Cost/Benefit Analysis 4 hours of econ and 3 hours of math is most efficient solution Econ 91 + math 89 = 180 total points – MAXIMUM number of points to be earned with seven hours of study Can you find more points with seven hours?

Cost/Benefit Analysis Economics Math Hrs. Study Score 1 58 63 2 73 79 3 85 89 4 91 93 5 95 96 6 98 99 7 100 85 + 93 = 178 178<180 +58 +6 +4 +3 +2 +15 +12 MB/MC +63 +4 +3 +1 +16 +10 MB/MC Problems with cost/benefit analysis: Can’t quantify all decisions People don’t always act rationally

Decision: ________________ Costs Benefits

And the Trouble is… Did anyone spot the big flaw? Let me help… what’s your favorite candy bar? How much utility would you get from one right now? And now we’re getting somewhere! How do you quantify utility? How are you supposed to use cost benefit analysis? C B/ A is lot easier for firms but that doesn’t mean it’s useless for us…

Before you go… An Exit Card Homework Define the word “scarcity” Identify what opportunity cost is Explain how these two are related Homework Complete Activities 1 & 2 on the Chapter 1 & 2 Worksheet Read Chapter 1.2: Factors of Production & Chapter 1.3: Three Questions