There is no such choice as a free choice Every Choice Has a Cost There is no such choice as a free choice

Objectives Define alternatives as different ways to achieve a goal Identify the opportunity cost of choosing between alternatives

OPPORTUNITY COST The Cost of a Choice Lesson 5: Opportunity Cost OPPORTUNITY COST The Cost of a Choice What will you (did you) give up when you made a decision?. Things don’t have costs, choices do. Perhaps the most important concept in economics

Choices When people choose between two different alternatives, they select one and give up the other. Hamburger or Spicy Chicken?

You want them both but can have only one. You choose the spicy chicken. The cost of the choice is the hamburger; you gave it up! Hamburger or Spicy Chicken?

Consumption Choices Anytime you decide between consumer goods, you pay a cost --- Which is the best alternative not selected.

Using a Resource You are a Middle school principal and you have just hired a new social studies teacher who, you are sure, is VERY good. For 3rd period, you can give him an Math class or the rowdy PE class which you are sure he could control. You choose to give him the Math class. What is the choice? What opportunity did you give up? What is the opportunity cost of your choice?

A “free” hike in the woods Lesson 5: Opportunity Cost A “free” hike in the woods Hike in the woods OR

The results of the decision Lesson 5: Opportunity Cost The results of the decision Choices: The subjective(Opinion) evaluation of the selected options Opportunity cost: the subjective evaluation of the best option NOT selected not what COULD have been done but what WOULD have been done

Opportunity cost is the value of the best foregone alternative Lesson 5: Opportunity Cost Opportunity cost is the value of the best foregone alternative at the time that you make the decision.

Lesson 5: Opportunity Cost What does it cost you? Diploma You have a scholarship for full tuition and all books. There are no money costs to you. Some say your education is free. What would you be doing with your scarce human capital if you weren’t pursuing an education? That is the cost of your education.

There is no such choice as a free choice.

Lesson 5: Opportunity Cost Opportunity cost is: Subjective (or your opinion) determined only by the decision-maker (you) Why are you watching television, you could be outside on such a beautiful day? TV Video games Talking to your girl/boy friend

To identify opportunity cost What is the good or resource that is being used? What was selected? What was given up?

Lesson 5: Opportunity Cost ECONOMICS The study of individual choices concerning the use of limited resources among competing goals Goals, resources, choices, costs How do we best use our scarce resources to achieve our goals?

Which of the following is an opportunity cost? Lesson 5: Opportunity Cost Which of the following is an opportunity cost? a. A bad grade on a quiz because you didn’t study and went out instead. Your mother’s hurt because you forgot her birthday since you decide to go camping. You Better Not! c. Not going out with your friends because you decide to work and make money. d. All of the above are opportunity costs.

Why would an economist never say, “The best things in life are free?” Lesson 5: Opportunity Cost Why would an economist never say, “The best things in life are free?”

Lesson 5: Opportunity Cost Why would an economist never say, “We should preserve old growth forests at all costs?”

Lesson 5: Opportunity Cost An economist would never say, “If it saves one life, it’s worth it,” because it ignores the concept of ……………………….” 11/17/2018

Lesson 5: Opportunity Cost What does it cost you? You were in love. You have been married 30 years. You are still in love. What has it cost you?

Lesson 5: Opportunity Cost Main Points People choose because resources are limited and not enough to achieve all of their goals; people can’t have everything they want. An economic decision involves using resources, goods or services. Every economic decision involves a cost. There is no such choice as a free choice.

Lesson 5: Opportunity Cost Main Points Opportunity cost is subjective and can only be identified by the decision maker. When people make a decision, they narrow the alternatives to two, select one (the choice) and give one up (the opportunity cost). In a study of economics, needs and wants can’t be distinguished. Economic reasoning ranks goals according to priorities.

Lesson 5: Opportunity Cost The Best Things in Life Are NOT Free!