Opportunity Cost

Decision making
Opportunity Cost
To an economist, cost is the cost
of what you give up when one
choice is made over another.
This is known as “opportunity
cost.”
This could mean money, time, or
resources either now or in the
future.
Opportunity Cost
The highest-valued, next-best
alternative that must be sacrificed to
obtain something or to satisfy a want
Opportunity Cost Example
For example, if you are given $20 and
you choose to go to the movies and
spend that $20. Your Opportunity Cost
would be everything else that you
could’ve done with that $20… like
a) Buy candy
b) Buy McDonalds
c) Save the money
Opportunity Cost
Questions
What is the opportunity cost of
attending this economics class?
What is the opportunity cost of
attending a concert by your favorite
band?
What is the opportunity cost of
increasing research for an AIDS
vaccine?
Opportunity Cost Video
 https://www.youtube.com/watch?v=whZORVxPaLE
 First minute-ish
Opportunity Cost
Create your own example of
opportunity cost.
Incentives
Incentives are methods used to
encourage people to take certain
actions.
They can also be benefits offered
to encourage people to act in
certain ways.
Grades in school, Wages,
Praise/Recognition, etc.
Examples of Incentives
Grades in school
Wages paid to workers
Praise and recognition
Cost-benefit analysis- is an
approach that weighs the
benefits of an action against
its costs.
Economize- To make
decisions according to the
best combination of costs and
benefits.
Trade-Off
Is the alternative option
people give up when they
make choices.
Usually trade-offs do not
require all-or-nothing choices.
Trade-off/Opportunity Cost Example

Timmy is failing Economics. He

has an Economics test next
Monday.
He hasn’t gone to tutorials after
school because he’s been
hanging out with his girl, Cindy,
instead.
Trade-off/Opportunity Cost
Example
Timmy has 6 hours of “free
time” after school every day
this week.
Timmy and his decisions…

Timmy has to make decisions

according to the best
combination of costs and
benefits. In other words,
Timmy has to _________.
Timmy’s Cost-benefit Analysis
If Timmy chooses to study
instead of hang out with Cindy,
he’ll pass the test.
If Timmy doesn’t hang out with
Cindy, she’ll talk to someone else
instead.
Timmy’s Cost-benefit Analysis
continued…

If Timmy chooses not to study,

he’ll fail the test.
If Timmy chooses to hang out
with Cindy, she’ll stay with
him.
 Incentives?
What is Timmy’s incentive
for studying?
What is Timmy’s incentive
for hanging out with Cindy?
Opportunity Cost?
If Timmy chooses to hang
out with Cindy, what would
be the opportunity cost?
Trade-off example
What would be an
example of a trade-
off?
Decision Making Grid
 Pg15.
 What is Max’s opportunity cost of 3 extra
hours of study?
 Read the information about marginal costs
on pg16. What would be Max’s marginal
cost of moving from a grade of B+ to A-?
 After high school decision making
grid
Copy down the decision making grid
in your notes.
Public schools vs. Private schools?
$ and Class size
Make your own…
Make your own decision making
grid based on classes you want to
take in college…
Underutilization- Means
producing fewer goods and
services than possible.
Efficiency- Involves producing
the maximum amount of
goods and services possible.
 How to represent opportunity
cost?
• The production
possibilities curve
(PPC) represents all
possible maximum
combinations of total
output that could
be produced.
PPC - Studying
Production Possibilities Table
 Pg. 19
 If you decided to make 35 muffins, how
many loaves of bread could you make?
 What is the opportunity cost of making the
7 loaves of bread?
Guns vs. Butter
• “Guns vs. Butter” was a major issue during the
presidency of Lyndon B. Johnson in the 1960s.
“Great Society” program called for a “war on
poverty.” This required the government funding of
many social reforms.
• An expanding war in Vietnam saw these government
funds being switched from domestic programs,
“butter”, to defense spending, “guns”.
• The opportunity cost of increasing defense
production was that the social programs could not be
funded.
PPC: Guns vs. Butter
 Copy figure 1.5 in your notes.
 What do the “guns” represent?
 What does the “butter” represent?