Fundamentals of Economics

Unit 1 – Ln 2 – Opportunity Cost

Mr. Mable

Econ 6120

How to think like an economist.

What word do you think of when you hear the word “economics”?

The The economiceconomic way of thinking. way of thinking.

Core Economic Principles

1. People make choices.2. All choices have costs.3. People respond to incentives in

predictable ways.4. Economic systems influence

incentives5. Consequences of choices lie in the

future.6. Voluntary exchange creates wealth.

Limited resources vs Unlimited wants

Scarcity

The underlying concept in economics.

Day 2 - What's the trade-off? What's my opportunity cost?

Scarcity necessitates choice.

Opportunity Cost is what you give up when you choose.

It’s the real cost.

opportunity cost

Two Roads Diverged in a Wood…

• http://www.youtube.com/watch?v=DEMDQSatfTU

• Robert Frost

• What is the meaning of this Poem?

opportunity cost, trade-offs

How to calculate opportunity cost?

• http://www.youtube.com/watch?v=VZrNbHCkv6A&feature=related

TRADE-OFFS

Econ Videos

Paul Solman on Opportunity Cost and costs and benefits

•http://www.youtube.com/watch?v=tk-5E8aVlgM&feature=related

http://www.youtube.com/watch?v=PNRObcLBpVM&playnext=1&list=PL3F69F2C6DADE7D1C&feature=results_main

Opportunity Cost

• The opportunity cost of a choice is the value of the best alternative given up.

• Reading: “Getting the Most Out of Life: The Concept of Opportunity Cost”

• http://www.econlib.org/library/Columns/y2007/Robertsopportunitycost.html

• Video

• “Freddie Has to Make Up His Mind”

• http://www.youtube.com/watch?v=bgDUK0lBhrI

• “Saving Private Ryan” – DVD – Chapter 9

• Captain Miller discusses the cost of saving Ryan in terms of lives lost.

• Consumers face scarcity and must make choices and incur opportunity costs. For example, a consumer with two hours of free time cannot go ice skating for two hours and see a movie. Whatever choice is made, the alternative given up is the opportunity cost.

• Businesses face scarcity and must make choices and incur opportunity costs. Suppose a grocery is deciding whether to add a café or a pharmacy. It only has space for one. It makes a choice; the one not selected is the opportunity cost.

• Governments face scarcity and must make choices and incur opportunity costs. For example, money spent on roads cannot be spent on education—or whatever would be the next best alternative.

• A tradeoff is not an all-or-nothing decision. For example, government could choose to trade off some money for roads to spend more on education.1

Cost-Benefit Analysis

What are the costs? What are the benefits?

(What benefits do you give up?) (What good things do you get?)

• What is the difference between what a government does and what an economy does?

What 3 Basic Questions do all economies have to answer?

• What to produce?

• How to produce?

• For whom to produce?

What are the main types of economies?

Who owns the resources? Who decides?

Main Types of Economies

• Command

• Market

• Tradition

• Mixed

Why are some nations rich and others poor?

Which of these nations do you think is the wealthiest?

A B C D E

Hans Roslings:

Four Minutes 200 yearshttp://www.youtube.com/watch?v=jbkSRLYSojo

What characteristics do wealthy nations have in

common?• Investments in human and physical capital• Economic freedom• Lower taxes• Less government regulation• Sound monetary policy• Protection of property rights• Incentives to save, invest, increase productivity• Competitive markets• Low inflation• Political stability