What is Economics? T HE STUDY OF INDIVIDUAL CHOICES CONCERNING THE USE OF RESOURCES AMONG COMPETING GOALS G ETTING THE BEST AND THE MOST FROM SCARCE RESOURCES H OW BEST TO ACHIEVE YOUR GOALS

10/26/20152 EVERY CHOICE HAS A COST. There is no such choice as a free choice.

10/26/2015Lesson 2: Cost3 OPPORTUNITY COST The Cost of a Choice What will you (did you) give up? Perhaps the most important concept in economics. Things don’t have costs, choices do.

A Truism 10/26/2015Lesson 2: Cost4 When people choose between two things, they select one and give up the other. Hamburger or Spicy Chicken?

You want them both but can have only one. 10/26/2015Lesson 2: Cost5 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 - -- the best alternative not selected. 10/26/2015Lesson 2: Cost6

Consumption Choices Anytime you decide between consumer goods, you pay a cost - -- the best alternative not selected. 10/26/2015Lesson 2: Cost7

Using a resource 10/26/2015Lesson 2: Cost8 You are an elementary school principal and you have just hired a new teacher Both your 4 th and 5 th grade classes are overcrowded. You can split either the 4 th or 5 th grade class and assign the new class to the new teacher. You choose to use him in the 4 th grade. What is the choice? What opportunity did you give up? What is the opportunity cost of your choice?

10/26/2015Lesson 2: Cost9 Preserving the environment is costly.

Using a Resource: Alaskan Land 10/26/2015Lesson 2: Cost10 What is your choice and what is the opportunity cost?

10/26/2015Lesson 2: Cost11 How to best use their human capital on their 3 month anniversary?

10/26/2015Lesson 2: Cost12 Some Alternatives

10/26/2015Lesson 2: Cost13 Narrow it down to two

10/26/2015Lesson 2: Cost14 Identify the Choice and the Opportunity Cost CHOICE OPPORTUNITY COST

10/26/2015Lesson 2: Cost Picnic with your friends A “free” hike in the woods Hike in the woodsOR

A friend has given you two “free” tickets to the 5 th game of the 2010 World Series There are no other tickets available at any price This could be the SF Giants first national championship You and your best friend have grown up together suffering through the Giants’ agony of defeat Your wife has been a Giants fan for years. You can go with your wife or your best friend. Is the choice to use the ticket “free?” 10/26/2015Lesson 2: Cost16

10/26/2015Lesson 2: Cost17 The “free” tickets Alternative Your best friend Alternative Your wife

10/26/2015Lesson 2: Cost18 The “free” tickets Alternative Your best friend Alternative Your wife Who do you choose? Who do you reject? Who is your choice? Who is your opportunity cost? Describe the opportunity cost? How will the reject treat you?

10/26/2015Lesson 2: Cost19 The results of the decision Choice: The subjective evaluation of the selected alternative Opportunity cost: the subjective evaluation of the best alternative NOT selected –not what COULD have been done but what WOULD have been done

10/26/2015Lesson 2: Cost20 Other examples Typing a term paper “Free parking” Resources for “free” early childhood education Resources for national defense Reduced class size Wildlife habitats

10/26/ Economic Decisions are made with incomplete information Expectations can be erroneous

10/26/2015Lesson 2: Cost22 The Curse of the Crawling Camel Clyde holds the record It’s past the record He sees his salvation ahead It is a mirage There is no such thing as a free lunch! There is really no such choice as a free choice!

10/26/ Stating that economic choices have an opportunity cost is the same thing as stating that scarce resources have alternative uses.

10/26/ Opportunity cost is the value of the best foregone alternative at the time that you make the decision.

10/26/2015Lesson 2: Cost25 What does it cost you? 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.

10/26/2015Lesson 2: Cost27 If you can’t do it, it’s not opportunity cost!

10/26/2015Lesson 2: Cost28 Opportunity cost is: subjective determined only by the decision-maker –Why are you watching television, you could be outside on such a beautiful day? TV Video games Talking to your girl/boy friend

10/26/2015Lesson 2: Cost29 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?

10/26/2015Lesson 2: Cost30 ECONOMICS Individuals, not groups Finance is an application of economics Economics can’t distinguish needs from wants – needs have no alternatives, therefore no choice, therefore no economics In economics, people rank their goals according to their priorities.

10/26/2015Lesson 2: Cost31 Which of the following is an opportunity cost? a. A bad grade on a quiz because you didn’t study b.Your mother’s hurt because you forgot her birthday You Scum! c. Not going out with your friends because you are called in to work. d. All of the above are opportunity costs.

10/26/ Why would an economist never say, “The best things in life are free?”

10/26/ Why would an economist never say, “We should preserve old growth forests at all costs?”

10/26/ An economist would never say, “If it saves one life, it’s worth it,” because it ignores the concept of ……………………….”

10/26/2015Lesson 2: Cost35 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?

10/26/2015Lesson 2: Cost36 Money A way of exchanging personal resources for goods and services –You work at California Pizza –You earn money –You use money to buy goods and services –You exchanged your human capital for goods and services that you desired

10/26/2015Lesson 2: Cost37 Money is a tool for transferring resources and goods and services

10/26/2015Lesson 2: Cost38 Money is a tool for transferring resources and goods and services

10/26/2015Lesson 2: Cost39 Money is a tool for transferring resources and goods and services

10/26/2015Lesson 2: Cost40 Main Points People choose because resources are limited and insufficient to achieve all of their goals; people can’t have everything they want. It is easier to choose between goods and “bads” than good and goods. An economic decision involves using resources, goods or services Every economic decision involves a cost. There is no such choice as a free choice.

10/26/2015Lesson 2: Cost41 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). Economics is the study of individual choices concerning the use of limited resources among competing goals.

10/26/2015Lesson 2: Cost42 Main Points Money is a tool for transferring resources into goods and services or exchanging one good or service for another Economics and finance are different. Economics is about resources; economic reasoning can be applied to finance. In a study of economics, needs and wants can’t be distinguished. Economic reasoning ranks wants according to priorities.

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