4Opportunity Costis what you cannot buy or do when you choose to do or buy one thing rather than another.IT IS THE NEXT BEST ALTERNATIVE THAT YOU HAD TO GIVE UP FOR THE CHOICE YOU MADE.(example: the opportunity cost of cleaning the house includes not only the price of cleaning products, but also the time you spent cleaning instead of doing something else, like listening to music.)
5Business Costs All business have fixed & variable costs. Fixed costs are expenses that are the same no matter how many units of a good are produced.Variable costs are expenses that change with the number of products produced. If a business produces more, variable costs like raw materials & wages will increase.
6Business Costs (continued) Fixed costs plus variable costs equal total costs.Marginal cost is the extra cost of producing one additional unit of output. If it costs an extra $50 to produce one more bicycle helmet, the marginal cost is $50.Total revenue equals the # of units sold times the average price per unit. Marginal revenue is the additional benefit associated with an action.
7Cost-benefit analysis is an economic model used to compare marginal costs & marginal benefits of a decision.You should choose an action when the benefits are greater than the costs. If the costs outweigh benefits, you should reject the option.Cost-benefit analysis could be used to help determine what to produce & for whom to produce.
8Economic ScenariosAlberta wants to invite her friends over for dinner, but the only time they can come is Tuesday night when her favorite show, “NCIS,” is on. She decides to invite her friends because she would enjoy their company. Alberta invites seven friends over, but she needs to know how many are coming so she’ll have enough food. Alberta is making spaghetti with meatballs and has to go to the grocery store no matter how many friends decide to come.Alberta’s Opportunity Cost ___________________________Alberta’s Fixed Cost _________________________________Alberta’s Variable Cost_____________________________________________
9Jack owns a shoe repair shop. His rent for the shop is $1500 Jack owns a shoe repair shop. His rent for the shop is $ a month. Jack pays his employees $8.00 an hour and adds a raise of $0.50 for every six months they have been working at Jack’s Shoes. Since the weekend is the busiest, Jack has three employees work on Friday and Saturday and only one employee on Monday through Thursday.Jack’s Fixed Cost _______________________________Jack’s Variable Cost _____________________________Incentive for Workers ___________________________
10Andy’s Pool Hall is open from 5 – 10 P. M Andy’s Pool Hall is open from 5 – 10 P.M. Andy is extending his store hours on Friday nights. He hears from many of his customers that he will have more business from college students if he keeps his pool hall open until 2 A.M. Andy is trying to decide if the benefits outweigh the costs of keeping the store open.Andy’s Fixed Cost _______________________________________Andy’s Variable Cost _____________________________________Andy’s Total Cost________________________________________Andy’s Marginal Cost _____________________________________Andy’s Marginal Revenue __________________________________
11Big Bob’s Tire Place needs more room to serve their customers Big Bob’s Tire Place needs more room to serve their customers. They have found a new location downtown about 20 minutes away from their old location.Opportunity Cost of moving the storeIncentives to move the storeYou are Big Bob… how do you make the decision to move or not?