Econ Essentials #3

Opportunity Cost

Opportunity Cost Objectives

1. To explain basic economic questions.

2. To define opportunity cost.

3. To estimate opportunity cost.

4. To explain how opportunity cost varies.

What The Economic Problem?

• We have limited resources, but unlimited wants

• This is known as

Thus, • We must allocateallocate

(distribute) our resources effectively

AND SO, • We have to make

choices or trade-offs

The Economic Questions!

1. What to produce?

– If resources are limited, what do we choose to use them for?

– If many new students move into the area, should we build another school or expand this one?

2. How to Produce?

• How do we make products?

• If building a house, do you buy new machines or hire more workers to make the product?

• Why might they hire more workers instead of buying new equipment?

3. For whom to produce?

• Who do we allocate our limited resources to?

• Should we spend more money on schools or jails?

Quick Review (Copy, if you want to!!) 1. Which of the following is a service?

A. Concert

B. Hot dog

C. Computer

2. Which of the following is a natural resource?

A. Hammer

B. Gold

C. Cash

The Road Not TravelledThe Road Not Travelled

• When we choose one thing, we lose

another – called Opportunity Opportunity CostCost – – value of the next best alternative you

must pass up (lost opportunity)

But, • How do you know what you

have missed out on?

Calculating the Cost• The Opp. Cost varies with the

situation

–Value of your time on a Wed night vs. Sat night

•Time is the ultimate

limitation / limited resource

•Sunk Cost: resources spent, that can’t be recovered –Do you walk out halfway through

a bad movie?