1. 1.3 Opportunity Cost and Choice
CONTEMPORARY ECONOMICS
6/15/2018
1.3 Opportunity Cost and Choice
Objectives
Define opportunity cost.
Evaluate guidelines for making choices.
Analyze the opportunity cost of attending college.
LESSON 1.3

2. 1.3 Opportunity Cost and Choice
Key Terms
opportunity cost
sunk cost

3. 1.3 Opportunity Cost and Choice
The opportunity cost of an item or activity is the value of the best alternative you must pass up.

4. Opportunity Cost Nothing better to do? Estimate opportunity cost
1.3 Opportunity Cost and Choice
Opportunity Cost
Nothing better to do?
Estimate opportunity cost
Opportunity cost varies

5. Choose Among Alternatives
1.3 Opportunity Cost and Choice
Choose Among Alternatives
Calculate opportunity cost
Time—the ultimate limitation
Ignore sunk cost
Sunk cost is a cost you have already incurred and cannot recover.

6. The Opportunity Cost of College
1.3 Opportunity Cost and Choice
The Opportunity Cost of College
Forgone earnings
Direct costs of college
Other college costs
Other-things-constant assumption

7. How an economist views a firm How an accountant views a firm
Rev-
enue
Economic profit
Accounting profit
revenue
Implicit costs
Opportunity cost
Explicit Costs
Explicit costs

8. PROBLEM…
Farmer McDonald gives banjo lessons for $20 per hour. One day, he spends 10 hours planting $100 worth of seeds on his farm. What opportunity cost has he incurred? What cost would his accountant measure? If the seeds will yield $200 worth of crops, does McDonald earn an accounting profit? Does he earn an economic profit?