The Next Best Alternative Opportunity Cost The Next Best Alternative

As a result of scarcity, choices have to be made

What Are Incentives? Incentives are factors that encourage or discourage various types of behaviors, actions or activities. Changes in incentives alter the way people behave. Incentives influence behavior at all levels- personal, familial, business, government, and national.

The Opportunity Cost of doing something is the value of the next best alternative you give up. What is the opportunity cost of investing $500 in a new stereo system? What is the opportunity cost of going to college?

There Is No Such Thing As A Free Lunch What if a financial planner offers to buy you lunch? You incur no money cost but you sacrifice time that could have been used to do something else. The value of your next best option is the opportunity cost of going to the “free” lunch.

The Opportunity Costs of Making a Decision Michael Jordan was cut from his high school varsity basketball team in his sophomore year. He then had to make the decision to either work harder to improve his skills or focus on another choice. Jordan decided to work harder on Basketball, but he faced the factor of not enough time. Once he decided to skip Biology to go to the gym to practice his skills. If you go to biology class, what do you have to give up? If you go to the gym to practice, what is your opportunity cost?

The opportunity cost of an action is the value of the best alternative. measures the undesirable aspects of that action. is the average amount of unhappiness experienced by everyone involved. will be the same for everyone.

Opportunity cost varies from person to person What would you have purchased if you did not purchase the $500 stereo system? What could you “earn” if you don’t go to college

An implicit opportunity cost of attending college is: Tuition. Books. Fees. income from foregone employment.

When we use resources to produce one good or service, the opportunity cost is that we cannot produce another good or service. When we make birdcages, we cannot use the same resources to make chairs.

Opportunity costs arise because of resource scarcity. True False

WHY ARE WE A NATION OF COUCH POTATOES? • Surf the television channels, glance at any news stand, or open a clothing catalog, and it becomes clear: Americans admire people who look slender and physically fit. • Yet, according to the Center for Disease Control and Prevention, only about 25 percent of Americans are getting enough exercise and about 35 percent of American adults are overweight. • The percentage of children who are overweight has doubled since the early 1970s.

Why do an increasing number of Americans, the same people who admire the trim, slender look so often featured in the media, exercise too little and eat too much?

Few Americans know that exercising more and eating less can help many people become healthier. True False

Exercise and a healthful diet are free. True False

In jobs that involve physical work, exercise is like a fringe benefit. True False

The price of food has been increasing. True False

Passive modes of entertainment — like television and video games — are popular with many Americans. True False

Common jobs in the past — in mining, farming, and manufacturing, for example — were much safer than today's jobs in technology, law, and finance. True False

SOLUTION TO THE COUCH POTATO MYSTERY THE MYSTERY Why do an increasing number of Americans, the same ones who admire the trim, slender look so often featured in the media, exercise too little and eat too much?

THE SOLUTION Americans are not gaining extra weight because they are lazy or because of a sudden increase in the desire to eat fatty foods. Instead, they are choosing new jobs created in a changing market system — new jobs that have resulted in less exercise.

Americans have in effect traded thinness for other values and work-related benefits enabling them to live longer and healthier lives. Some Americans enjoy new forms of passive entertainment; for them, the opportunity cost of physical activity would include giving up time they now spend watching TV or playing video games.

After graduating from high school, Steve had three choices, listed in order of preference: (1) matriculate at our campus, (2) work in a printed circuit board factory, or (3) attend a rival college. His opportunity cost of going to college here includes which of the following? the cost of books and supplies at the rival college the income he could have earned at the printed circuit board factory plus the direct cost of attending college here (tuition, textbooks, etc.) the benefits he could have received from going to the rival college only the tuition and fees paid for taking classes here

A professional basketball players' union negotiates a contract that dramatically increases all players' salaries. How would this influence the opportunity cost for a player who was considering giving up basketball to pursue a career in broadcasting? it would not affect the opportunity cost of playing basketball or of broadcasting it would increase the opportunity cost of continuing to play professional basketball it would cause the production possibilities frontier to become convex it would increase the opportunity cost of becoming a broadcaster

How do you get an A in this class? Of course, hard work and fulfilling requirements If you are unable to achieve an A by fulfilling requirements, you may be able to buy one. The going rate is one million dollars

If you pay $5,000 a year in tuition and give up $20,000 a year of income to attend college, then the yearly opportunity cost of college is: only $5,000 of tuition. only $20,000 of foregone income. $15,000, the difference between tuition and foregone income. S at least $25,000 of tuition and foregone income. less than $20,000 and more than $5,000.

The opportunity cost of economic growth is investment that a nation gives up to increase its economic growth. present consumption that a nation gives up to accumulate capital future consumption that a nation gets if it gives up some present consumption. future consumption that a nation gives up to consume more today

Suppose your friends take you out for dinner on your birthday and you have a much better time than you would have had doing anything else. There is still an opportunity cost, even though they will not let you pay for anything. True False

Production Possibilities Curve How do we decide which resources to use?

Production Possibilities Curve shows the maximum combinations of goods and services that can be produced from a fixed amount of resources in a given period of time. The curve can help people and business determine how much of each item to produce, thus revealing the trade – offs and opportunity costs involved in each decision

The Classic Example The trade – off between military defense and civilian goods…guns vs. butter. The extremes for a nation would be using all its resources to produce only one or the other.

The Classic Example Production Possibilities Curve Production Possibilities Frontier

Efficiency – using resources in such a way to maximize the production of goods and services Underutilization – using fewer resources than an economy is capable of using

Example: Jewelry Imagine that you run a jewelry – making business. Working 20 hours a week, you have enough resources to make either 10 bracelets or 5 pairs of earrings. If you want to make some of both these is your production possibilities…

Review How are trade – offs and opportunity costs related? How can society’s trade – offs be shown on a production possibilities curve?