Every Choice Has a Cost There is no such choice as a free choice

Objectives Define alternatives as different ways to achieve a goal Identify the opportunity cost of choosing between alternatives

11/5/2015Lesson 2: Cost3 OPPORTUNITY COST The Cost of a Choice What will you (did you) give up when you made a decision?. Things don’t have costs, choices do. Perhaps the most important concept in economics

A Truism 11/5/2015Lesson 2: Cost4 When people choose between two alter alternatives, they select one and give up the other. Hamburger or Spicy Chicken?

You want them both but can have only one. 11/5/2015Lesson 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. 11/5/2015Lesson 2: Cost6

Consumption Choices Anytime you decide between consumer goods, you pay a cost - -- the best alternative not selected. 11/5/2015Lesson 2: Cost7

Using a resource 11/5/2015Lesson 2: Cost8 You are a high school principal and you have just hired a new social studies teacher who, you are sure, is VERY good. For 3 rd period, you can give him an AP Econ class or the rowdy government class which you are sure he could control. You choose to give him the AP Econ class. What is the choice? What opportunity did you give up? What is the opportunity cost of your choice?

11/5/2015Lesson 2: Cost9 Preserving the environment is costly.

Using a Resource: Alaskan Land 11/5/2015Lesson 2: Cost10 What is your choice and what is the opportunity cost?

11/5/2015Lesson 2: Cost11 How to best use their human capital on their 3 month anniversary?

11/5/2015Lesson 2: Cost12 Some Alternatives

11/5/2015Lesson 2: Cost13 Narrow it down to two

11/5/2015Lesson 2: Cost14 Identify the Choice and the Opportunity Cost CHOICE OPPORTUNITY COST

11/5/2015Lesson 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?” 11/5/2015Lesson 2: Cost16

11/5/2015Lesson 2: Cost17 The “free” tickets Alternative Your best friend Alternative Your wife

11/5/2015Lesson 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?

11/5/2015Lesson 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

11/5/2015Lesson 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

11/5/ Economic Decisions are made with incomplete information Expectations can be erroneous

11/5/2015Lesson 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! Or, more precisely, there is no such choice as a free choice.

11/5/ Stating that economic choices have an opportunity cost is the same thing as stating that scarce resources have alternative uses.

11/5/ Opportunity cost is the value of the best foregone alternative at the time that you make the decision.

11/5/2015Lesson 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.

11/5/2015Lesson 2: Cost27 If you can’t do it, it’s not opportunity cost!

11/5/2015Lesson 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

To identify opportunity cost What is the good or resource that is being used? What were the two best alternative uses of the good or resource? What was selected? What was given up?

11/5/2015Lesson 2: Cost30 ECONOMICS Individuals make decisions, not groups 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.

11/5/2015Lesson 2: Cost31 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?

11/5/2015Lesson 2: Cost32 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.

11/5/ Why would an economist never say, “The best things in life are free?”

11/5/ Why would an economist never say, “We should preserve old growth forests at all costs?”

11/5/ An economist would never say, “If it saves one life, it’s worth it,” because it ignores the concept of ……………………….”

11/5/2015Lesson 2: Cost36 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?

11/5/2015Lesson 2: Cost37 Main Points People choose because resources are limited and insufficient to achieve all of their goals; people can’t have everything they want. An economic decision involves using resources, goods or services Every economic decision involves a cost. There is no such choice as a free choice.

11/5/2015Lesson 2: Cost38 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). In a study of economics, needs and wants can’t be distinguished. Economic reasoning ranks goals according to priorities.

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