OPPORTUNITY COST

DEFINITIONS

Consequence – something that logically or naturally follows from an action or condition. For example, if you stay out past your curfew, you will be grounded.

Opportunity Cost – the best alternative that is forgone because a particular course of action is pursued. For example, buying an expensive iPod Nano means you'll have less money to spend on fun weekend activities.

DEFINITIONS

Trade-off – an exchange of one thing in return for another, especially relinquishment of one benefit or advantage for another regarded as more desirable. For example, you want both a new outfit and a new and a class ring. You forgo the outfit for something that will last longer.

Decision-making – process by which consumers identify their needs, collect information, evaluate decisions and make or act on a decision. For example, you are going to purchase a car. First, list your needs (get to school, practice, must be safe, reliable, affordable, etc.); then you shop around (on Internet, in car dealerships, etc.); list the pros and cons to each car you find; buy your car. Explain how tradeoffs are associated with decision-making.

EXAMPLE 1

Tennis coach might videotape a tennis player's stroke and then study it frame by frame

JIM IS ABOUT TO PURCHASE A CD OF HIS

FAVORITE SINGER

Benefit -- hours of pleasure from listening to them

Cost -- price tag it costs $15

Alternatives

Listen to radio

Download song

Borrow CD

Determine if the benefits exceed the cost

WOMAN WALKING ALONG THE STREET WHEN SHE SEES A $1

BILL ON THE SIDEWALK. SHOULD SHE PICK IT UP?

Benefit -- $1 richer

Cost – 0 dollars

Alternative – What if the woman is Madonna, and she is hurrying to a recording studio where a symphony orchestra is waiting to perform with her

Determine if the benefits exceed the cost

Do something if it’s benefits outweigh its opportunity costs.

TO CALCULATE IT ASK YOURSELF THREE

QUESTIONS

1. What alternative opportunities are there?

2. Which is the best of these alternative opportunities?

3. What would I gain if I selected my best alternative opportunity instead of the choice I'm considering?

JIM IS ABOUT TO PURCHASE A CD OF HIS

FAVORITE SINGER

Benefit -- hours of pleasure from listening to them

Cost -- price tag it costs $15

Alternatives (other ways to spend the $15)

Sunglasses

CONSIDER A GOVERNMENT PROPOSAL

TO BUILD A NEW DAM

Here's how a poor decision-maker might view the problem

"If we build a dam, we'll have better flood control and cheaper electricity.

If we don't, then we'll experience occasional flooding, and electricity will be more expensive."

HERE'S ANOTHER WAY OF PRESENTING THE

PROBLEM:

"If we build the dam, it will provide us with flood control and cheaper electricity, but it will cost us $100 million."

HERE'S HOW AN ECONOMIST WOULD VIEW

THE PROBLEM:

"If we build the dam, we'll have flood control and cheaper electricity. But the $100 million to build the dam could be used instead to build two new high schools."

OPPORTUNITY COST OF GOING TO A

MOVIE  

Time to do homework: 3 hoursGas and parking: $1.50Admission to the theater: $2.00_______________________________________

Opportunity Cost: 3 hours and $3.50