Standard SSEF1 a. Define scarcity as a basic condition. d. Define opportunity cost as the next best alternative

What is the fundamental economic problem? Review What is the fundamental economic problem?

Review: Scarcity What is Scarcity?

What makes something Scarce? Must be desirable Must be limited Must have value (price) In order for an item to be desirable it must have Utility (be useful).

Which one is really worth more? Water Or Diamonds

Paradox of value Paradox of Value: A situation where a necessity is worth less than a non-necessity Value: refers to worth in dollars and cents OR what something is worth to you

Think about it…. Did you have to give up something to come to school today?

The NEXT BEST THING you could use your resource for. Opportunity Cost The NEXT BEST THING you could use your resource for.

Opportunity Cost The opportunity cost of a choice is the value of what you must give up when you make a particular choice. The choices people make have both present and future consequences.

Trade-Off Giving up some of one thing to get more of another Trade-offs are all those things you could have done with your time and/or money but didn’t choose to do.

Try it: Opportunity cost vs. Trade off Step 1- Think of 5 school appropriate things you would do with a couple of hours of free time this weekend . Write them down. Step 2 – List them from #1 being your first choice to #5 being your last

T-chart Trade-offs Things I would do with my free time. Economic Term 1. 2. 3. 4. 5. Things I would do with my free time. Economic Term Opportunity Cost Trade-offs

Marginal Analysis In economics the term marginal = additional “Thinking on the margin”, or MARGINAL ANALYSIS = making decisions based on the additional benefit vs. the additional cost.

Marginal Cost v. Marginal Benefit People make decisions based on costs and benefits The benefits must equal or outweigh the costs. Rational Decision Making takes place when marginal benefits equal or exceed marginal cost. RDM = ≥

Which flight should you choose? Why? Given the following assumptions, make a rational choice in your own self-interest (hold everything else constant)… 1. You want to visit your friend for the weekend 2. You work every weekday earning $100 per day 3. You have three flights to choose from: Thursday Night Flight = $300 Friday Early Morning Flight = $345 Friday Night Flight = $380 Which flight should you choose? Why? 15

Cost – Benefit Analysis Step 1 – Decide what your choices, or alternatives, are. Step 2 – List all marginal costs (“cons”) and marginal benefits (“pros”) in a decision making grid. Step 3 – Decide which choice (alternative) benefits you most.

Cost – Benefit Analysis List 3 choices of things to do after graduation. Use the following chart to complete a cost-benefit analysis to decide where you should go. Choices Cost The “cons” or negative consequences if you choose this. Benefits The “pros” or positive outcomes of your decision

Standard SSEF1 a. Define scarcity as a basic condition. d. Define opportunity cost as the next best alternative List 5 facts that will help you remember this lesson: