THE TRUE COST OF DECISIONS: OPPORTUNITY COST

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Presentation transcript:

THE TRUE COST OF DECISIONS: OPPORTUNITY COST Opportunity Cost and Tradeoffs Budgets and the Budget Line Point out that with limited income people will have to choose a sandwich or pizza. Review the term “marginal” As students to explain why the movement from A to B above is a marginal decision.

SUNK COSTS Sunk costs are costs that have been paid and cannot be recovered. EXAMPLE: Going to see your favorite sports team and they lose…you cannot ask for a refund. It is a sunk cost. Discuss with the class a product they’ve purchased and one year later were dissatisfied—that is sunk cost and cannot be recovered.

COMPARING BENEFITS & COSTS TO MAKE RATIONAL DECISIONS A rational decision benefits the decision maker as much as possible. A self- interested individual makes decisions for his or her own benefit. Wearing a seat belt is an example of a rational decision. What are examples of other rational decisions?

RATIONAL DECISION MAKING The net benefit of a choice is the benefit of the choice (measured in dollars) minus the cost of the choice. This is how we approach “which one” questions. Discussion: Explain how dollars are used to measure satisfaction. What makes one car better than the other? Be sure students recognize the net benefit idea.

MARGINAL ANALYSIS: DECIDING HOW MUCH? Marginal benefit is the additional benefit of doing something one more time. Marginal cost is the additional cost of doing something one more time. This is how we approach “how much” questions. DISCUSSION: Ask how net benefit sounds to them or their families. People say things like “its worth it” or “I’m glad we bought these”.

Marginal Analysis Simulation

1A Gargi Sean C Noah Shaanti Neehar Henna Katharine Allen Ryan James Dexter Sean W Matthew Devin Michelle Chloe Tiffany Deeksha Andrew, Obi, AJ

2A Katie Jack Taha Erika Mia J Ben Emily Meha Jack Mia B Josh Ester Jeeshan Sam Tarun Eddie Alexandra Chris Dylan, Thriaksh, Joel

1B Alexa Lauren Andrew Amanda Eric Olivia Thomas Maryam Andrew Dominick Odhran Dean Kelli Winston Audriti Purab Tiara Christina Fei Maggie Yash, Kevin, Rohit

2B Amanda Arielle Bradley Mansi Dolci Devanshu Arnav Mason Maddie Brianna Nathan Arya Nikita Nidhi Neha Dan Matthew Nivi

RATIONAL DECISION MAKING Have the students take out a piece of paper and write the steps in the left margin list the components of a recent decision they made to purchase an item.

WHAT IS BEHAVIORAL ECONOMICS? Behavioral economics is the branch of economics that uses ideas about decision making from psychology to explain economic behavior. Ask students to explain this idea: Economics is a behavioral science not a technical skill like accounting. What other consumer or firm behavior would economists most likely analyze? Are holiday “door busters” really a great deal or a way to lure customers to a particular store? Holiday sales are analyzed by economists yearly.

MISTAKES MADE WHILE MAKING DECISIONS 1. Allowing the presentation or framing of options to affect decisions 2. Letting sunk costs matter 3. Being too impatient 4. Making errors due to overconfidence 5. Avoiding change even when things could be better 6. Devoting time and energy to punish people who treat them unfairly even when it is not in the punisher’s self- interest. Ask the students as you advance through the slides to think of examples of a mistake they made when deciding to buy something.

MISTAKES PEOPLE MAKE Now, after they have thought about example in the last slide, this is a great place to have students or you look online at a retailer. Look at product prices over $100 and challenge students to identify mistakes for buyers based on the table.

Mistakes in Decision Making Performances As a table, create a 2 pg. script that describes a series of economic decisions which demonstrated two of the six mistakes previously shown. The two mistakes which your group must depict will be drawn at random. Presentations will be made to lead off the next class. Share your constructions with me. Skip one space between each actor’s line. Have fun.

1A Gargi Sean C Noah Shaanti Neehar Henna Katharine Allen Ryan James Dexter Sean W Matthew Devin Michelle Chloe Tiffany Deeksha Andrew, Obi, AJ

2A Katie Jack Taha Erika Mia J Ben Emily Meha Jack Mia B Josh Ester Jeeshan Sam Tarun Eddie Alexandra Chris Dylan, Thriaksh, Joel

1B Alexa Lauren Andrew Amanda Eric Olivia Thomas Maryam Andrew Dominick Odhran Dean Kelli Winston Audriti Purab Tiara Christina Fei Maggie Yash, Kevin, Rohit

2B Amanda Arielle Bradley Mansi Dolci Devanshu Arnav Mason Maddie Brianna Nathan Arya Nikita Nidhi Neha Dan Matthew Nivi