OPPORTUNITY COST

HOMEWORK QUESTIONS

1.What is another name for Opportunity Cost?

Trade off, Economic Cost,

2.When analyzing Opportunity Costs consumers must consider what two factors?

Benefits and Costs

3.What is a Sunk Cost?

A cost that must be paid regardless of the choice that is made.

4.What is an Explicit cost?

Opportunity cost that involves money

5.What is an Implicit cost?

Opportunity cost that does not involve money

JIM IS ABOUT TO PURCHASE A CD OF HIS FAVORITE SINGER

Benefit -- hours of pleasure from listening to them

Cost -- price tag it costs $15

Alternatives

Listen to radio

Download song

Borrow CD

Determine if the benefits exceed the cost

WOMAN WALKING ALONG THE STREET WHEN SHE SEES A $1 BILL ON THE

SIDEWALK. SHOULD SHE PICK IT UP?

Benefit -- $1 richer

Cost – 0 dollars

Alternative – What if the woman is Madonna, and she is hurrying to a recording studio where a symphony orchestra is waiting to perform with her

Determine if the benefits exceed the cost

Do something if it’s benefits outweigh its opportunity costs.

TO CALCULATE IT ASK YOURSELF THREE QUESTIONS

1. What alternative opportunities are there?

2. Which is the best of these alternative opportunities?

3. What would I gain if I selected my best alternative opportunity instead of the choice I'm considering?

JIM IS ABOUT TO PURCHASE A CD OF HIS FAVORITE SINGER

Benefit -- hours of pleasure from listening to them

Cost -- price tag it costs $15

Alternatives (other ways to spend the $15)

Sunglasses

CONSIDER A GOVERNMENT PROPOSAL TO BUILD A NEW DAM

Here's how a poor decision-maker might view the problem

"If we build a dam, we'll have better flood control and cheaper electricity.

If we don't, then we'll experience occasional flooding, and electricity will be more expensive."

HERE'S ANOTHER WAY OF PRESENTING THE PROBLEM:

"If we build the dam, it will provide us with flood control and cheaper electricity, but it will cost us $100 million."

HERE'S HOW AN ECONOMIST WOULD VIEW THE PROBLEM:

"If we build the dam, we'll have flood control and cheaper electricity. But the $100 million to build the dam could be used instead to build two new high schools."

OPPORTUNITY COST OF GOING TO A MOVIE  

Time to do homework: 3 hoursGas and parking: $1.50Admission to the theater: $2.00_______________________________________

Opportunity Cost: 3 hours and $3.50

Notice that Sheila correctly includes gas and parking in her opportunity cost calculations. But what about all the other costs associated with owning a car, like insurance and registration fees? Shouldn't she include them as part of the opportunity cost of going to a movie?

SUNK COSTS

The answer is no. If Sheila stayed home, she'd still have to pay the same insurance and registration fees. She can't reduce these costs by staying home.

Ignore sunk costs.

MAKE A CHOICE

Choice one Choice two Gave up (opportunity cost)

A night out with your friends

Visiting your grandmother on her birthday

Fund 10 patients to have dialysis for one year

Fund 1 patient to have a kidney transplant (expected to live 10 yrs)

Spend $2000 on a family holiday

Spend $2000 on a new roof

4 hours good time with friends or 3 hours Celebrating your grandmother’s birthday9 patients treatment for a year or 9 years free from dialysis for one patient

A week of good times with your family or a new roof with a dry house for 20 years

DOES ANYONE FEEL HUNGRY?

Oatmeal Cookies

UTILITY (satisfaction) FELT

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