Benefit/Cost Analysis
“Things don’t have costs;
choices do.”
Benefit/Cost analysis involves
the search for all alternatives.
The Five Steps
of Benefit/Cost Analysis
1. Identify the resources and state the goal
2. List alternative uses of the resources to
achieve the goal
3. Identify the advantages and disadvantages
of each alternative
4. Identify the choice and the opportunity cost
of the choice
5. Review the decision, was your choice right
for you?
Vocabulary
• Decision making – the process of
identifying a choice
• Goal – something that a person wants
to have or do
THE APRON
Bella’s Decision
Live happily with
Edward or Jacob
Edward
•
•
•
•
•
•
•
Advantages
Great car
Long life (death)
Good family
Handsome
Rich
Lots of education
Get to travel
•
•
•
•
•
•
•
Disadvantages
Danger to Bella
Nerdy
Abandons Bella
Glows in sunlight
Cold
No tan
Have to abandon father
Jacob
Advantages
•
•
•
•
•
•
•
Will protect Bella
Bella’s father approves
Hunk
Warm
Nice tan
Into motorcycles
Get to stay home
Disadvantages
•
•
•
•
•
Like a little brother
Potential danger
Abandons Bella
Moody
Bella has to take care of
him
• Smells bad when he’s
wet
Benefit/Cost – another
example
1. Sonja’s goal is to use her human capital to
have the best time possible at the senior
prom. With whom should she go?
2. Alternatives – Harry Potter or Spiderman
3. Advantages and disadvantages of each.
4. She chooses Spidey, the opportunity cost is
Harry.
Harry Potter
Advantages
Disadvantages
Spider Man
Advantages
Disadvantages
Keep in mind
• The choice is the alternative selected.
• The opportunity cost is the alternative not
selected, the opportunity given up.
• Every choice has a cost; there is no such
choice as a free choice.
• Disadvantages are not costs.
• With every decision, there is only one choice
and one cost.
Your Decisions
• List four decisions that you have made in the last
month and the opportunity cost of the choice. e.g. To
achieve the goal of ________, I used my _________
to _______ instead of _________.
,
– To achieve my goal of maximizing my wealth on Sunday I
used 3 hours of my human capital to watch football instead
of studying for my econ class.
Your students’ decisions
• List three decisions that your high
school might make, placing them in the
same format as the examples above.
Historical Decisions
• List three decisions that historical
characters made and put them in the
same format as the two above.
•
e.g. To achieve the goal of winning the war, George
Washington used his troops to withdraw from New
York rather than stay to fight the British.
Historical Decisions
• Colonist in 1776 – rebel or tory?
• Caesar in 30 BC – enter Rome with or
without army
• Truman 1945 – bomb or troops?
• Kennedy 1960 – Cuba bomb or
blockade
• 49er gold seeker – land or sea?
• Robert E. Lee – Union or Condederacy
Historical markets
• Why did Marc Antony want Egypt?
• Why did the English want to come into the
U.S. Civil war on the side of the South?
• Why did Columbus sail the ocean blue in
1492?
• Why did the people of New England want to
revolt against the English?
Alternative uses
of your money
(embedded human capital)
• Eat at home or eat out?
• What video?
• Brand name or generic shoes?
• What music
The importance of alternatives
• Power – an impressive list of
alternatives in terms of quantity and
quality
• Poverty – few good alternatives
• Your job in school – build your
human capital so that you will have
power