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Opportunity cost. Warm up?  List several activities you enjoy, such as reading, watching T.V., playing football, listening to your favorite music, etc.

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Presentation on theme: "Opportunity cost. Warm up?  List several activities you enjoy, such as reading, watching T.V., playing football, listening to your favorite music, etc."— Presentation transcript:

1 Opportunity cost. Warm up?  List several activities you enjoy, such as reading, watching T.V., playing football, listening to your favorite music, etc.  Include the amount of time you spend doing each activity in an average week.  Explain why you don’t spend more time doing these favorite things.  What opportunity costs would you pay to be able to do these things more often?

2 Ch.1 sec.3 Opportunity Cost and Choice  Opportunity cost-the value of the best alternative passed up for the chosen item or activity.  Nothing better to do? The choice selected seems, at the time.  Estimate Opportunity Cost – Only the individual decision maker can select the most attractive alternative.

3 Opportunity cost  The chooser, seldom knows the actual value of the best alternative you gave up, because that alternative is “the road not taken”.  Ex. eating pizza w/ friends or working on a term paper. You never know the exact value of what you gave up. You know only what you expected.Your expected value of working on that paper to exceed the value of the best alternative.

4 Opportunity Cost varies  Your opportunity cost depends on your alternatives.  Ex. You are less likely to study on a Saturday night than on a Tuesday night.  Your opportunity costs of studying is higher because your alternatives are more attractive than they are on a Tuesday night, when there’s less going on.  Opportunity cost is a personal thing, but in some cases, estimating a dollar cost for goods and services may work.

5 continued  You must calculate the value of all possible alternatives  Acquiring information about alternatives is costly and time-consuming, you usually make choices based on limited or even faulty information.  Some choices may turn out to be poor ones. Regret of lost opportunities “coulda, woulda, shoulda.

6 Time-The Ultimate Limitation  Ex. Sultan of Brunei $16 billion, he cannot enjoy his two palaces with his two wives. His time is scarce. Each activity undertakes his opportunity cost.  You face time constraint, especially when term papers and exams demand your time.

7 Ignore Sunk Cost  Sunk cost is a cost you have already incurred and cannot recover, regardless of what you do now.  Ex. Machines break down at your business. You’ll have to pay to fix or replace and it is part of the business, which will not persuade you to open or have your business.

8 continued  Ignore sunk cost in making economic choices.  Economic decisions makers should consider only those costs that are affected by their choice.  Sunk cost already have been incurred and are not recoverable. Sunk cost are irrelevant and should be ignored.

9 The Opportunity Cost for college  Full time college?  Most valued alternative to attend college.  If you know the type of job you can get after college you are far ahead.

10 Average yearly earnings  No High School $19,229  High School $28,950  Some College $30,170  Bachelor’s Degree $52,264  Professional Degree $70,000

11 Homework  Page 26 #1-9  Page 29 – 31 #1-36

12 Page 29-31  1. D. good  2. G. market  3. E. human resources  4. I. Opportunity cost  5. B. economics  6. A. capital goods  7. J. service

13 Page 29  8. C. entrepreneur  9. H. natural resources  10. F. marginal  11. True  12. B. a tree standing in a forest  13. Entrepreneur  14. profit

14 Page 29  15. False. Services are different from goods because they are intangibles that require scarce resources to produce and satisfy human wants.  16. A. crude oil in the ground  17. False. It is not a free good because there is a cost for your playing football there. You are keeping the park from being used for and alternative reason, such as Frisbee or soccer.  18. Economic theory or model

15 Page 30  19. A. consider only variables that interest them.  20. True  21. Positive  22. False. The assumption of rational self- interest does take into consideration concern for others.  23. D. Rose should be paid more than $8.00

16 Page 30  24. False. Most of the disagreement among economists involves debates over normative statements.  25. Marginal, marginal  26. A. Tyrone received a 5% raise in his wage from his employer last year.  27. True  28. D. the value of the pizza she would have bought if she had not gone to the movie.

17 Page 30  29. False. The opportunity cost still exists: It is the decision to do nothing or to do the alternative.  30. False. The value of an opportunity cost of a particular choice varies for all people.  31. C. other uses of extra income earned because of the college education  32. True  33. B. the $30 monthly payment you already agreed to make to connect to the Internet.

18 Page 31  34. A. Brad watches Monday-night football on his new TV (households) B. The Sony Corporation produces a new TV (firms) C.Brad works at a local drugstore (resource market) D. Brad buys a new TV from a Sears store (product market)

19 Page 31  35. Answers will vary. Students should demonstrate an understanding of opportunity cost and the fact the fact that people have different opportunity costs because they have different values.

20 Page 31  Answer will vary. Natural resources might include the land the wheat was grown on, the rain that fell on the field,or natural gas that was taken from the ground to heat the oven. Human resources might include the effort that was used to harvest the wheat, grind it into flour, or to knead the dough. Capital goods might include the tractor used to plow the field, the mill used to grind the wheat into flour, or the oven used to bake the bread.

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