Opportunity Cost August 14, 2008

Trade-offs Guns or butter? All the alternatives we give up when choosing one course of action over another Individuals, businesses, and even governments make decisions that involve trade-offs Guns or butter?

Opportunity Cost The most desirable alternative given up as the result of a decision What is the opportunity cost of a country’s decision to produce more “guns”?

Karen’s Decision-Making Grid Alternatives Benefits Enjoy more sleep Have more energy during the day Better grade on test Teacher and parental approval Personal satisfaction Decision Sleep late Wake up early to study for test Opportunity Cost Extra study time Extra sleep time Benefits Forgone Sleep late Wake up early to study

Coach Ramsey and the snooze button Thinking at the Margin Deciding whether to do or use one additional unit of some resource The previous example was “all or nothing” Karen actually could have decided among several options Coach Ramsey and the snooze button