Opportunity Cost
Scarcity
• The most basic economic problems
• People want more then there is.
– Resources are limited
– Wants are unlimited
Examples of Scarcity
• Money: Want to go see a movie?
– You have $10.00, but the movie costs
$10.50
• Time: Finish homework and play video
games before bed
– Once you finish your homework, it is time
to get ready for bed.
• Ran out of time for games.
• Resources: Countries, like the U.S., want
to spend $ on resources- education and
health.
– Instead need to use $ for roads and
defense.
• Pot hole season!
Businesses and Scarcity
• Must make many decisions:
– which goods and services to make.
– How much of a product to make.
• Do not have enough resources to do
everything they want.
• Can make more then one product, but it costs
more.
Can you think of an example of
scarcity?
Making Choices
• Why do we have to choose between two
options?
– Because our wants and needs are bigger then our
resources
• How do you choose? (milk or cookie?)
– Economics is the study of how people and
governments make these choices.
Trade-Off
• Resources
– Are scarce
– Can only be used one way at a time
• Pencil- I can use it to write, OR I can use it to style my
hair. I cannot do both at the same time.
• Land- Owner can use it to farm corn, OR golf course.
• Money- Buy a friend dinner, OR buy a new video game.
• You cannot use the same resource (pencil,
land, money), at the same time, for different
things.
Trade-off
• In a Trade-off, you give up one thing for
another.
– The trade off for buying the basketball is you will
not be able to take your friend out.
–
VS.
1. Who makes Trade-offs?
• Everyone makes trade-offs!
– Individuals: Should I watch this movie or play my
video game?
– Businesses: Should I use this land to farm corn, or
to use as a golf course?
– Government: Should we use this money to fix the
roads, or give it to schools?
2. Why do decisions lead to trade-offs?
• Decisions lead to trade-offs because…
– You can use resources only one way at a time
• This means you can’t have it both ways!
• Remember the song by the Rolling Stones
– "You can't always get what you want"
Opportunity
• Each possible use of a
resource is an opportunity.
• Every time we make a
choice we give up an
opportunity to do
something else.
– I will make pasta sauce with
my tomato…
– Guess I can’t make salsa
today.
• What are the opportunities
for using a Tomato
– Soup
– Pasta Sauce
– Sandwich
– Salad
– Salsa
– etc
Opportunity Cost
• The cost of something is how much it is worth.
• Those tomatoes cost $5.00
• Opportunity Cost is the cost of giving up the
other choice.
– The next best (2nd best) choice not taken
• Salsa is the opportunity cost of me deciding to make
pasta sauce.
3. Why are opportunity costs different
for each possible choice?
• Each opportunity has many choices
• The 2nd best choice of each decision is the
opportunity cost, which will change with
every decision you make.
6. What is the difference between a
trade-off and an opportunity cost?
• A trade-off is the act of choosing one thing
over another.
– I will use the tomato to make pasta sauce.
• Opportunity cost is the 2nd best choice that
you have given up because of the trade-off
made.
– I have given up the opportunity to make…
Thinking at the Margin:
• Folding paper:
– Fold your paper in half one time.
– How many times do you need to fold the paper so it
will,
• Fit in pocket of pants
• lay flat in pocket (no one can see it)
• How many more times do you need to fold the
paper?
• How many less times did some of you need to
fold the paper?
Cost/Benefit Analysis
• When making a decision, you have to look at
what you may be giving up by picking
something and what you may be getting.
– Pros- would be the benefits of your choice.
– Cons- would be the cost of your choice.
Cost/Benefit chart: Pasta sauce vs. other
options (salsa).
Benefit/Pro
Cost/Con
7. What is the purpose of a
cost/benefit analysis?
• A cost/benefit analysis will…
• help determine (find out) what you will gain
(benefit) and lose (cost) by taking a specific
action.
• Benefit- I get to eat pasta
• Cost- I can’t have salsa
4. What do you compare when you
think at the margin?
• When you think at the margin, you compare…
– marginal cost with marginal benefit.
Marginal Cost vs. Marginal Benefit
Marginal Cost
• Extra cost of making one
more of something
• What if I wanted to make
ONE more pan of pasta
sauce?
– What is the Cost?
Marginal Benefit
• Extra benefit of adding one
more of something.
• What if I wanted to make
ONE more pan of pasta
sauce?
– What is the benefit?
5. How can thinking at the margin help
improve profits?
• Businesses can look at the point where the
marginal benefit is higher then the marginal
cost
– This is the point where businesses will make the
most money.
– If Marginal Cost is higher then the Marginal
Benefit then companies lose money.