Every Choice Has a Cost
There is no such choice
as a free choice
Objectives
• Define alternatives as different ways to
achieve a goal
• Identify the opportunity cost of choosing
between alternatives
OPPORTUNITY COST
The Cost of a Choice
• What will you (did you) give up
when you made a decision?.
• Things don’t have costs, choices
do.
• Perhaps the most important
concept in economics
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A Truism
• When people choose between two alter
alternatives, they select one and give up
the other.
Hamburger or Spicy Chicken?
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You want them both but can
have only one.
• You choose the spicy chicken.
• The cost of the choice is the hamburger;
you gave it up!
Hamburger or Spicy Chicken?
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Consumption Choices
Anytime you decide between
consumer goods, you pay a cost -- the best alternative not
selected.
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Consumption Choices
Anytime you decide between
consumer goods, you pay a cost -- the best alternative not
selected.
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Using a resource
• You are a high school principal and you have
just hired a new social studies teacher who,
you are sure, is VERY good.
• For 3rd period, you can give him an AP Econ
class or the rowdy government class which
you are sure he could control.
• You choose to give him the AP Econ class.
• What is the choice?
• What opportunity did you give up? What is
the opportunity cost of your choice?
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Preserving the environment
is costly.
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Using a Resource:
Alaskan Land
What is your choice and what
is the opportunity cost?
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How to best use their human
capital on their 3 month
anniversary?
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Some Alternatives
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Narrow it down to two
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Identify the Choice and the
Opportunity Cost
OPPORTUNITY
COST
CHOICE
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A “free” hike in the woods
Picnic with your friends
Hike in the woods
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OR
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A friend has given you two “free” tickets to
the 5th game of the 2010 World Series
• There are no other tickets available at any
price
• This could be the SF Giants first national
championship
• You and your best friend have grown up
together suffering through the Giants’ agony
of defeat
• Your wife has been a Giants fan for years.
• You can go with your wife or your best friend.
• Is the choice to use the ticket “free?”
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The “free” tickets
Alternative
Your best friend
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Alternative
Your wife
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The “free” tickets
Who do you choose? Who do you reject?
Who is your choice? Who is your opportunity
cost?
Describe the opportunity cost? How will the
reject treat you?
Alternative
Your best friend
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Alternative
Your wife
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The results of the decision
• Choice: The subjective evaluation of the
selected alternative
• Opportunity cost: the subjective
evaluation of the best alternative NOT
selected
– not what COULD have been done but what
WOULD have been done
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Other examples
• Typing a term paper
• “Free parking”
• Resources for “free” early childhood
education
• Resources for national defense
• Reduced class size
• Wildlife habitats
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Economic Decisions are made
with incomplete information
Expectations can be erroneous
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The Curse of the Crawling
Camel
• Clyde holds the record
• It’s past the record
• He sees his salvation
ahead
• It is a mirage
• There is no such thing as a
free lunch!
• Or, more precisely, there is
no such choice as a free
choice.
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Stating that economic
choices have an opportunity
cost is the same thing as
stating that scarce
resources have
alternative uses.
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Opportunity cost is the value
of the best foregone
alternative
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at the time that
you make the
decision.
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What does it cost
you?
• You have a scholarship
for full
tuition and all books.
• There are no money costs to
you.
• Some say your education is free.
• What would you be doing with your
scarce human capital if you weren’t
pursuing an education? That is the
cost of your education.
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There is no such choice
as a free choice.
If you can’t do it, it’s not
opportunity cost!
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Opportunity cost is:
• subjective
• determined only by the decision-maker
– Why are you watching television, you could be
outside on such a beautiful day?
• TV
• Video games
• Talking to your girl/boy friend
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To identify opportunity cost
• What is the good or resource that is
being used?
• What were the two best alternative uses
of the good or resource?
• What was selected?
• What was given up?
ECONOMICS
• Individuals make decisions, not groups
• Economics can’t distinguish needs from
wants – needs have no alternatives,
therefore no choice, therefore no
economics
• In economics, people rank their goals
according to their priorities.
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ECONOMICS
• The study of
– individual choices
– concerning the use of limited resources
– among competing goals
– Goals, resources, choices, costs
• How do we best use our scarce
resources to achieve our goals?
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Which of the following is an
opportunity cost?
a. A bad grade on a quiz because you didn’t
study
b. Your mother’s hurt because you forgot her
birthday
You Scum!
c. Not going out with your friends because you
are called in to work.
d. All of the above are opportunity costs.
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Why would an economist
never say, “The best things in
life are free?”
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Why would an economist
never say, “We should
preserve old growth forests at
all costs?”
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An economist would never
say, “If it saves one life, it’s
worth it,” because it ignores
the concept of
……………………….”
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What does it cost
you?
You were in love.
You have been
married 30 years.
You are still in
love.
What has it cost
you?
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Main Points
• People choose because resources are limited
and insufficient to achieve all of their goals;
people can’t have everything they want.
• An economic decision involves using
resources, goods or services
• Every economic decision involves a cost.
There is no such choice as a free choice.
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Main Points
• Opportunity cost is subjective and can only be
identified by the decision maker.
• When people make a decision, they narrow
the alternatives to two, select one (the choice)
and give one up (the opportunity cost).
• In a study of economics, needs and wants
can’t be distinguished. Economic reasoning
ranks goals according to priorities.
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