Opportunity Cost Ch 1.2

Trade-offs: all alternatives that we give up whenever we choose one course of action over another

Slumdog Millionaire Trade-off

Decisions Every decision you, businesses, and governments make has trade-offs Guns or butter: trade-offs nations face whether to produce more military or consumer goods

Safety How important is safety to you and making decisions? Should individuals, businesses, and governments do whatever possible to ensure safety? TSA, FDA, FFA

Opportunity Cost most desirable alternative given up as a result of a decision EXAMPLE - If you go to school you cannot sleep in, watch The Price is Right, play video games, or hang out with your cat. If you were to not go to school what would you be doing? Whatever your second choice is would be the opportunity cost

Externality A consequence of an economic activity that is experienced by unrelated third parties. Positive – Public Education Negative - Pollution

Free Rider Problem Some individuals in a population either consume more than their fair share of a common resource, or pay less than their fair share of the cost of a common resource. Examples – Evading taxes

Decision-Making Grid

Work vs Movie

THINKING @ THE MARGIN deciding whether to do or use 1 additional unit of some resource EXAMPLE: If you need to do 2 hours of HW, or you watch 2 hours of TV, you look at doing 1 hour of HW & 1 hour of TV BASICALLY…you’re NOT taking an “all or nothing” approach to the decision

Cost & Benefit @ the Margin you can figure out how to get some of both alternatives Businesses & governments use this, too, to see what they can sacrifice and what they’ll gain Once the opportunity cost outweighs the benefits, no more units should be added Example of Cost Benefit Analysis in your life. You want to skip Mrs. Hanko’s lecture on opportunity costs and go home. What would the benefits be? What about the costs/risks? Which decision should you make based on the benefits/costs?