Opportunity Cost What is it Tradeoffs p Tradeoffs

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Opportunity Cost What is it?

Opportunity Cost What is it?

Trade-offs p Trade-offs are all the alternatives we give up whenever we choose one

Trade-offs p Trade-offs are all the alternatives we give up whenever we choose one course of action over another. p Every decision we make involves tradeoffs.

Trade-offs p p p Individuals make trade -offs but businesses also do. Decisions made

Trade-offs p p p Individuals make trade -offs but businesses also do. Decisions made about land, labor, and capital involve trade-offs. For example, if a farmer plants broccoli, he cannot plant corn.

Society and trade-offs p p p Countries also make decisions that involve trade-offs. This

Society and trade-offs p p p Countries also make decisions that involve trade-offs. This is called guns or butter. This means that materials used for military purposes are not available for domestic purposes.

What do we mean by opportunity cost? p When we decide to do something,

What do we mean by opportunity cost? p When we decide to do something, one of the things we could have done is usually better than the others. p This second best thing is called the opportunity cost.

Opportunity cost p In other words, you could have slept in instead of coming

Opportunity cost p In other words, you could have slept in instead of coming to school today. You chose to come to school. The opportunity cost was sleeping in.

Opportunity cost p Some decisions are easy but sometimes choosing between alternatives can be

Opportunity cost p Some decisions are easy but sometimes choosing between alternatives can be hard.

You could make an opportunity grid. Alternative 1 Benefits Decision Opportunit y cost Benefits

You could make an opportunity grid. Alternative 1 Benefits Decision Opportunit y cost Benefits given up (cost) Alternative 2 Alternative 3

Opportunity cost p p Remember: When you make a decision, you give up something

Opportunity cost p p Remember: When you make a decision, you give up something – this is the opportunity cost. Or as an economist might say, “Choosing is refusing. ”

Margins p p p But is a decision always just all or nothing? Instead

Margins p p p But is a decision always just all or nothing? Instead of sleeping all day and not coming to school at all, what if you wanted to sleep five more minutes? What about an extra half hour? This is called the margin.

Decision making at the margin p Comparing the opportunity cost and the benefits at

Decision making at the margin p Comparing the opportunity cost and the benefits at the margin helps make good decisions. p At what point do the costs outweigh the benefits? p The margin is where you consider the cost of one more.

Thinking at the margin-using a grid can help make the best choice Options Benefit

Thinking at the margin-using a grid can help make the best choice Options Benefit Opportunity Cost 1 st hour of extra Grade of C on study time test One hour of sleep 2 nd hour of extra Grade of B on study time test Two hours of sleep 3 rd hour of extra Grade of B+ on study time test Three hours of sleep

Thinking at the margin p p p Deciding by thinking at the margin is

Thinking at the margin p p p Deciding by thinking at the margin is like any other decision What will you sacrifice? What will you gain? When the opportunity cost outweighs the gain, it’s time to stop.

One more thing…. p TANSTAAFL p There ain’t no such thing as a free

One more thing…. p TANSTAAFL p There ain’t no such thing as a free lunch! p Every choice has an opportunity cost!

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