1. Do Now Would you rather be the richest person on the planet, or immortal? Would you rather have 10 wishes (no wishing for money!) or $100 billion? Would you rather have free Starbucks for a year, or free iTunes forever? Would you rather find true love, or $10 million? Would you rather make $1million a year, knowing what you were doing would hurt people, or $15,000 a year doing something you love?

2. Opportunity Cost

3. Trade Offs Every time we choose to do something, we give up the opportunity to do something else. All individuals, businesses, and large groups of people (even governments) make decisions that involve trade-offs. * Trade-off: the act of giving up one benefit in order to gain another, greater benefit

4. Everyone does it (trades-off) Individuals: –a part in the school play prevents you from playing soccer or getting a part-time job –an exciting but low-paying job vs. a less interesting job that pays better –a vacation vs. putting more money away for retirement

5. Everyone does it (trades-off) Business have to make decisions about how to use their factor resources (land, labor, and capital) –a furniture company that uses all of its equipment to make chairs cannot use the same equipment to build tables or desks

6. Everyone does it (trades-off) Government – national, state, and local gov’t also make decisions that involve trade-offs –“guns or butter” – a phrase expressing the idea that a country that decides to produce more military goods (“guns”) has fewer resources to produce consumer goods (“butter”), and vice versa

7. Determining Opportunity Cost Opportunity Cost: the most desirable alternative given up as the result of a decision –namely, the value to you of what you were willing to sacrifice

8. Determining Opportunity Cost Consider the following choices: –Sleep late or wake up early to study for a test? –Sleep late or wake up early to eat breakfast? –Sleep late or wake up early to go on a trip? Your decision depended on the specific opportunity cost – the value of what you were willing to sacrifice…

9. “Choosing is Refusing” When we select one alternative, we must sacrifice at least one other alternative and its benefits….

10. Thinking at the Margin The process of deciding whether to do or to use one additional unit of some resource –when you make a decision, it is not usually an all-or-nothing situation…

11. Thinking at the Margin Decision makers have to compare the opportunity costs and the benefits – what they will sacrifice and what they will gain –called Cost/Benefit analysis Marginal Costs: the extra cost of adding one unit Marginal Benefit: the extra benefit of adding one unit Basically, is the extra benefit worth the extra cost?

12. Wrap Up What are trade-offs? Why does every choice involve an opportunity cost? How can a cost/benefit analysis help people make decisions?