Opportunity Cost Chapter 1 Section 2 TradeOffs They
- Slides: 7
Opportunity Cost Chapter 1, Section 2
Trade-Offs • They are all the alternatives that we give up when we make a choice – This is the case in your individual life and in business • Society – The Guns or Butter debate – Basically, if a country spends on the military (Guns) then they have less to spend on consumer goods (Butter) and vice versa – This is because resources are limit (scarcity)
Opportunity Cost • When individuals, companies or governments make a choice they face trade-offs • Your second choice is your opportunity cost
Decision-Making Grid Alternatives Sleep Late Wake up early to study Benefits • Enjoy more sleep • Have more energy during the day • Better grade on the test • Teacher and guardian approval • Personal satisfaction Decision • Sleep late • Wake up early to study for test • Extra study time Extra sleep time Opportunity Cost Benefits forgone (given up) • Better grade on the test • Teacher and guardian approval • Personal satisfaction • Enjoy more sleep • Have more energy during the day
Opportunity Cost $ • Important: • When you evaluate opportunity cost when it comes to money… • I spend $5 on gum instead of $5 on chips – The opportunity cost is $5 of chips – But if the initial investment is bad you could have a opportunity cost double the initial value
Thinking at the Margin • This means thinking about more or less of a certain decision • I’ve decided to Study: Options Benefits Opportunity Cost 1 hour of studying C on the test 1 hour of sleep 2 hours of studying B on the test 2 hours of sleep 3 hours of studying B+ on the test 3 hours of sleep
Thinking at the Margin • At some point the opportunity cost will become greater then the returns on your decision. • Knowing when that will happen is key for a good decision
