1. Ch 1.2: Opportunity Cost Ch 1 Essential Question
How can we make the best economic choices?

2. Objectives Explain why every decision involves trade-offs.
Summarize the concept of opportunity cost.
Describe how people make decisions by thinking at the margin.

3. Trade-offs
Trade-offs are what we give up when we make a decision because resources are limited
All individuals, businesses, and large groups of people make decisions that involve trade-offs.
Trade-offs involve things that can be easily measured such as money, property, and time
Tradeoffs include tough to measure things like enjoyment or job satisfaction.

4. Opportunity Costs
In most trade-offs, one of the rejected alternatives is more desirable than the rest.
The most desirable alternative somebody gives up as a result of a decision is the opportunity cost.
Checkpoint: Why does every choice involve an opportunity cost?
We always face an opportunity cost. When we select one alternative, we must sacrifice another

5. Decision-Making Grids
Using a decision-making grid can help you decide if you are willing to accept the opportunity cost of a choice you are about to make.
Are you willing to sacrifice the opportunity cost?
Checkpoint Answer: Because when you select one alternative, you must sacrifice another.

6. Thinking on the Margin: Cost/Benefit Analysis Marginal Benefit vs
Thinking on the Margin: Cost/Benefit Analysis Marginal Benefit vs. Marginal Cost
When you decide how much more or less to do, you are thinking on the margin.
So, you decided to study more. How much more?
Deciding by thinking on the margin involves comparing the opportunity costs and benefits for each extra unit of resource
i.e. Benefit/Cost of extra hour of work/study
This decision-making process is called a cost/benefit analysis.

7. Thinking on the Margin: Cost/Benefit Analysis Marginal Benefit vs
Thinking on the Margin: Cost/Benefit Analysis Marginal Benefit vs. Marginal Cost
To make good decisions on the margin, you must weigh marginal costs against marginal benefits.
The marginal cost is the extra cost of adding one unit such as sleeping an extra hour or opening one extra store.
The marginal benefit is the extra benefit of adding the same unit.

8. Marginal Benefit > Marginal Cost
Thinking on the Margin: Cost/Benefit Analysis Marginal Benefit vs. Marginal Cost
Marginal Benefit > Marginal Cost
You are better off making the decision to use the next unit of resource
Benefit outweighs cost
Marginal Benefit < Marginal Cost
Stop using the resource
Cost outweighs benefit

9. Thinking on the Margin: Cost/Benefit Analysis Marginal Benefit vs
Thinking on the Margin: Cost/Benefit Analysis Marginal Benefit vs. Marginal Cost
What is the Marginal Benefit and Marginal Cost of one extra hour of sleep?
What decision should we make (Remember: MB > MC)
1st Hour: MB = 1 Letter Grade; MC = 1hr Sleep (MB>MC)
2nd Hour: MB = 1 Letter Grade; MC = 1hr Sleep (MB>MC)
3rd Hour: MB = 1/3 Letter Grade: MC = 1hr Sleep (MB<MC)
Answers: one extra hour of study time; a higher grade on the test.

10. Objectives Explain why every decision involves trade-offs.
Summarize the concept of opportunity cost.
Describe how people make decisions by thinking at the margin.
Because of limited resources, we sacrifice/give up something when we make a decision
The most desirable alternative we give up when making a decision
Compare marginal benefits vs. marginal costs. Make decisions if MB > MC

11. Key Terms
trade-off: the alternatives that we give up when we choose one course of action over another
“guns or butter”: a phrase expressing the idea that a country that decides to produce more military goods (“guns”) has fewer resources to produce consumer goods (“butter”) and vice versa
opportunity cost: the most desirable alternative given up as the result of a decision

12. Key Terms, cont.
thinking at the margin: the process of deciding how much more or less to do
cost/benefit analysis: a decision-making process in which you compare what you will sacrifice and gain by a specific action
marginal cost: the extra cost of adding a unit
marginal benefit: the extra benefit of adding a unit