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Opportunity Cost

Opportunity Cost. Scarcity. The most basic economic problems People want more then there is. Resources are limited Wants are unlimited. Examples of Scarcity. Money: Want to go see a movie? You have $10.00, but the movie costs $10.50 Time: Finish homework and play video games before bed

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Opportunity Cost

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  1. Opportunity Cost

  2. Scarcity • The most basic economic problems • People want more then there is. • Resources are limited • Wants are unlimited

  3. Examples of Scarcity • Money: Want to go see a movie? • You have $10.00, but the movie costs $10.50 • Time: Finish homework and play video games before bed • Once you finish your homework, it is time to get ready for bed. • Ran out of time for games. • Resources: Countries, like the U.S., want to spend $ on resources- education and health. • Instead need to use $ for roads and defense. • Pot hole season!

  4. Businesses and Scarcity • Must make many decisions: • which goods and services to make. • How much of a product to make. • Do not have enough resources to do everything they want. • Can make more then one product, but it costs more.

  5. Can you think of an example of scarcity?

  6. Making Choices • Why do we have to choose between two options? • Because our wants and needs are bigger then our resources • How do you choose? (milk or cookie?) • Economics is the study of how people and governments make these choices.

  7. Trade-Off • Resources • Are scarce • Can only be used one way at a time • Pencil- I can use it to write, OR I can use it to style my hair. I cannot do both at the same time. • Land- Owner can use it to farm corn, OR golf course. • Money- Buy a friend dinner, OR buy a new video game. • You cannot use the same resource (pencil, land, money), at the same time, for different things.

  8. Trade-off • In a Trade-off, you give up one thing for another. • The trade off for buying the basketball is you will not be able to take your friend out. • VS.

  9. 1. Who makes Trade-offs? • Everyone makes trade-offs! • Individuals: Should I watch this movie or play my video game? • Businesses: Should I use this land to farm corn, or to use as a golf course? • Government: Should we use this money to fix the roads, or give it to schools?

  10. 2. Why do decisions lead to trade-offs? • Decisions lead to trade-offs because… • You can use resources only one way at a time • This means you can’t have it both ways! • Remember the song by the Rolling Stones • "You can't always get what you want"

  11. Opportunity • Each possible use of a resource is an opportunity. • Every time we make a choice we give up an opportunity to do something else. • I will make pasta sauce with my tomato… • Guess I can’t make salsa today. • What are the opportunities for using a Tomato • Soup • Pasta Sauce • Sandwich • Salad • Salsa • etc

  12. Opportunity Cost • The cost of something is how much it is worth. • Those tomatoes cost $5.00 • Opportunity Cost is the cost of giving up the other choice. • The next best (2nd best) choice not taken • Salsa is the opportunity cost of me deciding to make pasta sauce.

  13. 3. Why are opportunity costs different for each possible choice? • Each opportunity has many choices • The 2nd best choice of each decision is the opportunity cost, which will change with every decision you make.

  14. 6. What is the difference between a trade-off and an opportunity cost? • A trade-off is the act of choosing one thing over another. • I will use the tomato to make pasta sauce. • Opportunity cost is the 2nd best choice that you have given up because of the trade-off made. • I have given up the opportunity to make…

  15. Thinking at the Margin: • Folding paper: • Fold your paper in half one time. • How many times do you need to fold the paper so it will, • Fit in pocket of pants • lay flat in pocket (no one can see it) • How many more times do you need to fold the paper? • How many less times did some of you need to fold the paper?

  16. Cost/Benefit Analysis • When making a decision, you have to look at what you may be giving up by picking something and what you may be getting. • Pros- would be the benefits of your choice. • Cons- would be the cost of your choice.

  17. Cost/Benefit chart: Pasta sauce vs. other options (salsa). Benefit/Pro Cost/Con

  18. 7. What is the purpose of a cost/benefit analysis? • A cost/benefit analysis will… • help determine (find out) what you will gain (benefit) and lose (cost) by taking a specific action. • Benefit- I get to eat pasta • Cost- I can’t have salsa

  19. 4. What do you compare when you think at the margin? • When you think at the margin, you compare… • marginal cost with marginal benefit.

  20. Marginal Cost vs. Marginal Benefit Marginal Cost Marginal Benefit Extra benefit of adding one more of something. What if I wanted to make ONE more pan of pasta sauce? What is the benefit? • Extra cost of making one more of something • What if I wanted to make ONE more pan of pasta sauce? • What is the Cost?

  21. 5. How can thinking at the margin help improve profits? • Businesses can look at the point where the marginal benefit is higher then the marginal cost • This is the point where businesses will make the most money. • If Marginal Cost is higher then the Marginal Benefit then companies lose money.

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