OPPORTUNITY COSTS
People’s choices involve costs
 Use of scarce resources can be costly so
tradeoffs must be made
 Opportunity Cost – the highest value
alternative that must be Sacrificed as the result
of choosing an option - “What you lose when
you choose”
 If I didn’t go to Mt Lemmon this weekend I
would have gone out to dinner with my
husband
 Think of an example of an opportunity cost and
write it down
TANSTAAFL
 There Ain’t No Such
Thing As A Free
Lunch
 Use of a resource to
produce a pair of
jeans diverts it from
another use
 Going to school is
free of charge but it
is not free
Individuals choose purposefully
 Economizing behavior – choosing the
option that offers the greatest benefit at the
least possible cost
 Purposeful or rational decision making
 Going out to dinner – you don’t choose the
most expensive option unless it gives you
more pleasure
 If there were 3 dinner specials that all cost
$15, you would choose the one that you
like best
In your notes
 Write down a non food example of
economizing behavior
Opportunity Cost
What is the opportunity cost of getting married?
 All the other people you could be dating
2. The OC of government fixing the roads is the labor
and materials.
 False
3. The OC of hiring police officers is funding an after
school arts program.
 True
4. The OC of coming to school are the wages you
could earn working at a job.
 True
1.
Opportunity costs for women - 1945
 Laundry by hand (4 hrs
washing, 41/2 ironing
 Now - washing 41
minutes, 1 ¾ hrs
ironing
 Opportunity cost much
higher to work outside
the home in 1945 so
less women did it
 Todd recently purchased his own car on
credit. He works at a part-time job at an
auto-wrecking firm to earn the money
he needs to make payments on his new
car. Lately, his work in school has
declined. When his teacher asked him if
he was studying for the tests, he replied,
“Not really. I’d like to study more, but I
have no choice. I’ve got to keep working
to pay off my car loan.”
 Describe situations where you may have felt you
had no choice. For example:
 “I have to put gas in the car so I can get to work
 tonight.”
 Write example in your notes.
 A. What was Ashley’s problem?
 B. What alternatives did Ashley
have?
 C. What were the costs of each
alternative?
 D. What were the benefits?
 Utility – benefit or satisfaction a person
expects from a choice or course of action
 Cost/Benefit Analysis: comparison of what
you will sacrifice and gain by a specific action
 Marginal Cost: the extra cost of adding one
unit
 Marginal Utility: the extra benefit of adding
one unit
 Marginal Revenue (benefit) = Marginal
Cost
Costs
 Explicit costs – out of pocket expenses
 The price of the movie ticket
 Implicit costs – the value of resources
that could have been used elsewhere
 Pay you would have earned if you had
gone to work rather than gone to the
movies
– making the decision for 1 more “how much”
is a decision at the margin
 What should I do for the next hour?
 At what mileage should I change the oil?
Production Possibilities Frontier – understand
the trade offs