Chapter 1 Section 2: Opportunity Costs

Trade offs Alternatives that we give up whenever we choose one course of action over another Individuals & trade offs – Every decision involves a trade off

Businesses & trade offs – Decisions that business people make about how to use land, labor, & capital resources also creates trade offs

Society & trade offs – Guns or butter A country that decides to produce more military goods has fewer resources to devote to consumer goods & vice versa

Defining Opportunity Cost Most desirable alternative given up as a result of a decision Every ordinary decision that we make everyday involves an opportunity cost

Using a decision making grid Can help you determine whether you are willing to accept the opportunity cost of a choice you are about to make

Economists encourage us to consider the benefits and costs of our decisions. BenefitsEnjoy more sleep Have more energy during the day Better grade on test Teacher and parental approval Personal satisfaction DecisionSleep lateWake up early to study for test Opportunity costExtra study timeExtra sleep time Benefits forgoneBetter grade on test Teacher and parental approval Personal satisfaction Enjoy more sleep Have more energy during the day Sleep lateWake up early to study Alternatives Karen’s Decision-making Grid

Making the decision With each new situation, the opportunity costs & benefits change We always face opportunity costs – When we select one alternative, we have to sacrifice at least one alternative & forgo its benefits – By recognizing what we are sacrificing, we can decide whether the decision is worth it

Opportunity Cost: the foregone alternative Think: “next-best”

SCARCITY IS: EVEN IN THE FACE OF ABUNDANCE... What’s scarce when you’re in the Mall of America? at the all-you-can-eat buffet?

Opportunity Cost Analysis What was the 1 st decision you made this morning?

Opportunity Cost Analysis Alternatives:Get Up NowDon’t Get Up Now Perceived Benefits Choice Opp. Cost Benefits Refused Decision Maker: YOU

Opportunity Cost Analysis Alternatives:Get Up NowDon’t Get Up Now Perceived Benefits Shower bkfst don’t rush On time coffee Choice Opp. Cost Benefits Refused Decision Maker: YOU More sleep

Opportunity Cost Analysis Alternatives:Get Up NowDon’t Get Up Now Perceived Benefits Shower bkfst don’t rush On time coffee Choice X Opp. Cost Benefits Refused Decision Maker: YOU More sleep X

Opportunity Cost Analysis Alternatives:Get Up NowDon’t Get Up Now Perceived Benefits Shower bkfst Coffee don’t rush On time ChoiceX Opp. CostX Benefits Refused More sleep Decision Maker: YOU

Thinking at the Margin Many decisions involve adding one unit or subtracting one unit

Making a decision at the margin When you decide how much more or less to do, you are thinking at the margin.

Cost & benefit at the margin Such a comparison could help someone decide how much money to spend on a car, how many hours to work, & how much time to spend watching TV

Cost/Benefit Analysis – Decision makers just have to compare the opportunity costs & the benefits What they will sacrifice & what they will gain Once the opportunity cost outweighs the benefits, no more units should be added