CHAPTER 1 SECTION 2 ECONOMIC CHOICE TODAY OPPORTUNITY
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CHAPTER 1 SECTION 2 ECONOMIC CHOICE TODAY: OPPORTUNITY COST OBJECTIVES: 1) UNDERSTAND WHY CHOICE IS AT THE HEART OF ECONOMICS 2) EXPLAIN HOW INCENTIVES AND UTILITY INFLUENCE PEOPLE’S ECONOMIC CHOICES DECISIONS 3) CONSIDER THE ROLE OF TRADE-OFFS AND OPPORTUNITY COST IN MAKING ECONOMIC 4) DEMONSTRATE HOW TO USE A COST BENEFIT ANALYSIS
KEY TERMS: PLEASE DEFINE 1. Incentive: 2. Utility: 3. Economize: 4. Trade-off: 5. Opportunity cost: 6. Cost-benefit analysis: 7. Marginal cost: 8. Marginal benefit:
KEY CONCEPT #1: MAKING CHOICES Factor 1 Motivations for Choice How do we make decisions when we are faced with scarcity? Factor 2 “No Free Lunch” Plain and simple: every choice involves a cost -What are the incentives or what are the benefits offered? -What is the utility or what are the benefits or satisfaction gained? -How do the cost of my decision weigh against the benefits? Econonmize http: //www. learnliberty. org/content/incentivesmatter
KEY CONCEPT #2: TRADE-OFFS AND OPPORTUNITY COST Example 1 Making Trade-Offs The choice you give up. . Example 2 Counting the Opportunity Cost The value of the choice given up. . .
KEY CONCEPT #3: ANALYZING CHOICES (WEIGHING THE BENEFITS AGAINST THE COST) Marginal Cost and Marginal Benefits A Decision Making Grid is an example of a cost benefit analysis because it evaluates the relative worth of choices by examining the cost and expected benefits of those choices. In economics, one of the primary measuring sticks for making decisions is weighing marginal benefits and marginal costs. What do we mean by the word marginal? In simplest terms, the word marginal means ‘one more. ’ For example if I consider eating one more slice of pizza, I ask myself, what is the benefit of one more slice of pizza? What is the cost of eating one more slice of pizza? Some benefits might take the form of enjoying the flavor, satisfying hunger pains or the satisfaction that you stole the last piece from your brother. Some of the marginal costs involved might be heartburn later in the evening, added weight, increased oil build-up on your face, or the emotional distress caused when your brother argues with you over why you always get to have the last piece. When the cost of ‘one more’ begins to pass the benefit of ‘one more, ’ it’s time to stop.
