Section 2: Opportunity Cost. Trade-Off The ACT of giving up one thing to get another thing You...

WHAT IS ECONOMICS?

Section 2: Opportunity Cost

Trade-Off

The ACT of giving up one thing to get another thing

You can’t have your cake and eat it, too!

Trade-Offs Individual Trade-offs

BUY

SAVE

THISTHAT

Trade-Offs Business Trade-offs

Trade-Offs Government Trade-offs

Guns (military spending)Butter (spending on the people)

Opportunity Costs

Just wait, it’s not so simple …..There are often SEVERAL choices which

need to be sacrificed with trade-offs.○ Some are so ridiculous that it’s easy to drop

them

Opportunity CostsBut some choices are harder to make

because the goods or services are good alternatives!

Opportunity Cost is the BEST thing which you have to give up in a trade-off

Decision Making Grids Opportunity Cost Grid

Alternatives

Sleep Late Wake up Early to Study

Benefits Gotten

Enjoy sleeping Have more energy during the

day

Better grade on the test Teacher and parental

approval Personal satisfaction

Benefits Missed

Better grade on the test Teacher and parental approval Personal satisfaction

Enjoy sleeping Have more energy during

the day

Opportunity Cost(What GOOD alternative did you

give up in order to get this?)Extra time to study Extra time to sleep

THINK ABOUT IT

Please respond to the prompt in your packet

Thinking at the Margin

More realistic approachNot a simple

○ “either/or” choice○ “black/white”

choiceMany shades of

grayInclude little

increments

Thinking at the Margin At the WHAT? Think this way …

This paper is using NO margins. The writing takes the ENTIRE page from left to right. It looks kind of funny because we are used to seeing a margin on both sides of the paper.

But this is an ALL or NOTHING world. It’s all writing and no margin.

This paper is using small margins. The writing takes up most of the page from left to right. It looks more normal because we are used to seeing a margin on both sides of the paper. This is a case where we have some margins.

This paper is using even larger margins. The blank part takes almost all of the page from left to right. We moved the margins just a bit more. In this case, might it be too much?

Decision Making Grids

Cost/Benefit AnalysisA way (process) to look at what is lost

versus what is gained.○ Opportunity COSTS○ Opportunity BENEFITS

Decision Making Grids

Cost/Benefit AnalysisIncludes MARGINAL COSTS

○ What positive opportunities are lost with each increment (portion) of a sacrifice?

○ It’s PORTIONS not “All or Nothing”Includes MARGINAL BENEFITS

○ What positive opportunities are gained with each increment (portion) of a sacrifice?

○ It’s PORTIONS not “All or Nothing”

Decision Making Grids

A POSITIVE Choice is obvious as long as the marginal benefits are greater than the marginal costs!

Option Cost Benefit Is it worth the extra Cost to get the extra

Benefit?Get ONE extra hour of

study time One hour of sleep Grade goes up to a C Yes

Get TWO extra hours of study time Two hours of sleep Grade goes up to a B Yes

Get THREE extra hours of study time Three hours of sleep Grade goes up to a B+ No

Think About It

Please respond to the prompt in your packet