Opportunity CostOpportunity Cost

Opportunity CostOpportunity Cost

Every decision has an opportunity costEvery decision has an opportunity cost

Choosing is refusingChoosing is refusing

A decision next best alternative A decision next best alternative

The decision the sacrifice The decision the sacrifice

Opportunity CostOpportunity Cost

The best alternative that you have to sacrificeThe best alternative that you have to sacrifice

Getting something of value almost always costs Getting something of value almost always costs something (money, time, work, etc. or something (money, time, work, etc. or opportunity to do something else).opportunity to do something else).

Whatever is chosen, the trade-off is always an Whatever is chosen, the trade-off is always an opportunity to do or buy something else.opportunity to do or buy something else.

Acting one way instead of another.Acting one way instead of another.

Why are we willing to sacrifice?Why are we willing to sacrifice?

Decision making-tableDecision making-table

Benefits that outweigh benefits forgone Benefits that outweigh benefits forgone

are are incentivesincentives

As economists, we must see the world in As economists, we must see the world in terms of decisions and opportunity costs.terms of decisions and opportunity costs.

Decisions are not just “yes” and “no” or Decisions are not just “yes” and “no” or black or white.black or white.

Trade-offsTrade-offsGood economics thinks about the trade-offs and the Good economics thinks about the trade-offs and the secondary effects that can happen when trade-offs secondary effects that can happen when trade-offs occur.occur.

What would it mean to have a little more or a little less What would it mean to have a little more or a little less and what are the possible trade-off and counter and what are the possible trade-off and counter reactions.reactions.

People act in their own self-interests – or for their own People act in their own self-interests – or for their own incentives.incentives.

““Guns or Butter”Guns or Butter”

Thinking at the MarginThinking at the Margin

How much more or how much less to do.How much more or how much less to do.

Decision Making at the MarginDecision Making at the MarginComparing opportunity costs and benefitsComparing opportunity costs and benefits

Cost/benefit analysisCost/benefit analysis Marginal CostMarginal Cost Marginal BenefitMarginal Benefit

Must decide what’s sacrificed v. what’s gained.Must decide what’s sacrificed v. what’s gained.

Once the opportunity cost outweighs the Once the opportunity cost outweighs the benefits, no more units should be added.benefits, no more units should be added.