1. Opportunity cost
STARTER: Explain the diagram below in 4 sentences (ensure you use ‘the economic problem in your answer’

2. Objectives of the lesson:
To understand in more detail the concept of opportunity cost and how it differs from a trade-off
To summarise Samuelson’s three questions of economics

3. Limited resources Resources are limited in two essential ways:
Limited in physical quantity, as in the case of land, which has a finite quantity.
Limited in use, as in the case of labour and machinery, which can only be used for one purpose at any one time.
GIVE 2 EXAMPLES FOR THE ABOVE.

4. Choice and opportunity cost
Choice and opportunity cost are two fundamental concepts in economics. Given that resources are limited, producers, consumers and the Government have to make choices between competing alternatives.
All economic decisions involve making choices.
Task - Think of at least 2 economic decisions that individuals, companies and governments must have to make.
E.g. Governments have to decide how to best use tax payers’ money.

5. Explained
Making an economic choice creates a sacrifice because alternatives must be given up, which results in the loss of benefit that the alternative would have provided.
For example, if an individual has £10 to spend, and if books are £10 each and downloaded music tracks are £1 each, buying a book means the loss of the benefit that would have been gained from the 10 downloaded tracks. 
Similarly, land and other resources, which have been used to build a new school could have been used to build a new factory. The loss of the next best option represents the real sacrifice and is referred to as opportunity cost.  The opportunity cost of choosing the school is the loss of the factory, and what could have been produced. 

6. Summary
It is necessary to appreciate that opportunity cost relates to the loss of the next best alternative, and not just any alternative. The true cost of any decision is always the closest option not chosen.

7. Theory - Samuelson's three questions
America’s first Nobel Prize winner for economics, the late Paul Samuelson, is often credited with providing the first clear and simple explanation of the economic problem - namely, that in order to solve the problem of scarcity all societies, no matter how big or small, developed or not, must endeavour to answer three basic questions.

8. Question 1: What to produce?
Societies have to decide the best combination of goods and services to meet their needs. For example, how many resources should be allocated to consumer goods, and many resources to capital goods, or how many resources should go to schools, and how many to defence, and so on.
Write down the difference between a consumer good and a capital good.

9. Question 2: How to produce?
Societies also have to decide the best combination of factors to create the desired output of goods and services. For example, precisely how much land, labour, and capital should be used produce consumer goods such as computers and motor cars.

10. Question 3 - For whom to produce?
Finally, all societies need to decide who will get the output from the country’s economic activity, and how much they will get. For example, who will get the computers and cars that have been produced? This is often called the problem of distribution.

11. Task
Stonehenge – read the case study and answer the questions

12. Trade-off Similar to opportunity cost BUT there is an option.
Trade-offs when making choices
Making a choice made normally involves a trade-off – this means that choosing more of one thing can only be achieved by giving up something else in exchange.
Housing: Choices about whether to rent or buy a home     – there are costs and benefits to renting a property or in choosing to buy     a home with a mortgage. Both decisions involve risk. People have to weigh up the costs and benefits of the decision.
Working: Do you work full-time or part-time? Is it worth your while studying for a degree? How have these choices been  affected by the introduction of university tuition fees
Transport and travel: The choice between using Euro-Tunnel, a low-cost ferry or an airline when travelling to Western Europe.

13. The cost benefit principle
Every purchase is a trade-off, of course. If you decide to spend £10,000 on a new car, you’re saying that’s worth more to you than 20 bicycles or four vacations to Europe or the deposit on a house. Every choice involves opportunity costs; when you choose one thing, you’re giving up others (what you’re giving up isn’t always financial)
In many of these decisions, people consider the costs and benefits of their actions – economists make use of the ‘marginal’  idea, for example what are the benefits of consuming a little extra of a product and what are the costs.
Economic theory states that rational decision-makers weigh the marginal benefit one receives from an option with its marginal cost, including the opportunity cost.

14. Plenary D
All of the answers A

15. HOMEWORK Exam question – 8 marks
Assessed on analysis – explain your points
Consider evaluation – a counter argument
Discuss 2 possible reasons why the Government may have to consider the cost of tuition fees for university places.