Chapter 1 Section 2 Opportunity Costs Trade offs

  • Slides: 20
Download presentation
Chapter 1 Section 2: Opportunity Costs

Chapter 1 Section 2: Opportunity Costs

Trade offs • Alternatives that we give up whenever we choose one course of

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

• 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

• 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

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

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.

• Economists encourage us to consider the benefits and costs of our decisions. Karen’s Decision-making Grid Alternatives Sleep late Wake up early to study 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 • Better grade on test • Teacher and parental approval • Personal satisfaction • Enjoy more sleep • Have more energy during the day

Making the decision • With each new situation, the opportunity costs & benefits change

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”

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

SCARCITY IS: EVEN IN THE FACE OF ABUNDANCE. . . What’s scarce when you’re

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 What was the 1 st decision you made this morning?

Opportunity Cost Analysis Decision Maker: YOU Alternatives: Perceived Benefits Choice Opp. Cost Benefits Refused

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

Opportunity Cost Analysis Decision Maker: YOU Alternatives: Perceived Benefits Choice Opp. Cost Benefits Refused

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

Opportunity Cost Analysis Decision Maker: YOU Alternatives: Perceived Benefits Choice Opp. Cost Benefits Refused

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

Opportunity Cost Analysis Decision Maker: YOU Alternatives: Perceived Benefits Choice Get Up Now Shower

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

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

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

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

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 &

• 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

Costs Variable costs costs of Fixed costs costsCosts Variable costs costs of Fixed costs costs
SSEF 1 Scarcity Resources Trade Offs and OpportunitySSEF 1 Scarcity Resources Trade Offs and Opportunity
Unit 1 Lesson 1 8 Trade Offs OpportunityUnit 1 Lesson 1 8 Trade Offs Opportunity
CHAPTER 2 Trade Offs Comparative Advantage and theCHAPTER 2 Trade Offs Comparative Advantage and the
TRAIT TRADE OFFS AND CELL SIZE FOR OCEANTRAIT TRADE OFFS AND CELL SIZE FOR OCEAN
Energy Trade Offs and TIRES A presentation byEnergy Trade Offs and TIRES A presentation by
Lecture 12 n n Timespace trade offs AddersLecture 12 n n Timespace trade offs Adders
WHAT IS ECONOMICS THE STUDY OF TRADE OFFSWHAT IS ECONOMICS THE STUDY OF TRADE OFFS
TRADE OFFS IN LAND USE PLANNING A CASETRADE OFFS IN LAND USE PLANNING A CASE
TOOL WORKSHOP Trade offs between thermal comfort andTOOL WORKSHOP Trade offs between thermal comfort and
Understanding and Exploiting the Trade Offs between BroadcastingUnderstanding and Exploiting the Trade Offs between Broadcasting
Chapter Two Hidden Costs Opportunity Costs and SunkChapter Two Hidden Costs Opportunity Costs and Sunk
The Nature of Costs Explicit Costs Accounting CostsThe Nature of Costs Explicit Costs Accounting Costs
Capital Costs Operating maintenance costs life Cycle costsCapital Costs Operating maintenance costs life Cycle costs
Indirect Costs 1 Indirect Costs Defined Indirect costsIndirect Costs 1 Indirect Costs Defined Indirect costs
BUDGETED COSTS Andr Rudder FEES vs COSTS CostsBUDGETED COSTS Andr Rudder FEES vs COSTS Costs
Types of Costs Fixed Costs Variable Costs 1Types of Costs Fixed Costs Variable Costs 1
PRODUCTION COSTS Definitions Short run costs costs thatPRODUCTION COSTS Definitions Short run costs costs that
OPPORTUNITY COSTS Peoples choices involve costs Use ofOPPORTUNITY COSTS Peoples choices involve costs Use of