1. Opportunity Cost
August 14, 2008

2. Trade-offs Guns or butter?
All the alternatives we give up when choosing one course of action over another
Individuals, businesses, and even governments make decisions that involve trade-offs
Guns or butter?

3. Opportunity Cost
The most desirable alternative given up as the result of a decision
What is the opportunity cost of a country’s decision to produce more “guns”?

4. Karen’s Decision-Making Grid
Alternatives
Benefits
Enjoy more sleep
Have more energy during the day
Better grade on test
Teacher and parental approval
Personal satisfaction
Decision
Sleep late
Wake up early to study for test
Opportunity Cost
Extra study time
Extra sleep time
Benefits Forgone
Sleep late
Wake up early to study

5. Coach Ramsey and the snooze button
Thinking at the Margin
Deciding whether to do or use one additional unit of some resource
The previous example was “all or nothing”
Karen actually could have decided among several options
Coach Ramsey and the snooze button