Trade-offs and Opportunity Cost

Trade-off  Is the alternative you face if you decide to do one thing rather than another.  You choose to buy a Playstation 3 in exchange for money. You could be spending your money on something else for the same price or you could buy less expensive items for that money.

 Another example would be talking on the phone rather than studying for a test.  If you study for the test you might be able to get a better grade.  However, you decide to talk on the phone in turn leaving you not able to study for the test.  This can also be reversed if you do study for the test you are limiting yourself from talking on the phone.

 Company may want to put more money into education, but by doing this they are in turn not using money for medical research or national defense.  Choose to use resources in one way and not the other.

Opportunity Cost  Is the cost of the next best use of your time or money when you choose to do one thing rather than another.  Cleaning the house: The price of the cleaning products, it also includes the time you could spend on other things such as listening to music or hanging out with friends.

 Going to college: have to pay for books and tuition, College is more expensive  One of the biggest costs that you will not be able to earn because the time you will have to spend studying and going to classes.

Incentives  Are rewards that are offered to try to persuade people to take certain economic actions  Also known as “carrots”  Offer bonuses  Credit cards offering low interest rates to try to convince consumers to choose their credit card  Scholarships and Financial Aid

Fixed Costs  Costs, or expenses, that are the same no matter how many units of a good are produced.  Mortgage Payments and Property Taxes are examples  It doesn’t matter if you produce a little number of something or a lot the coast will stay the same.

Variable Cost  Expenses that change with the number of products that are produced.  Wages and Raw Material are examples  Will increase as production grows  Will decrease when production decreases

Total Cost  Add Fixed Costs to Variable Costs and you get Total Cost  F + V = T  IF Fixed Cost is $1000 and Variable Cost is $500 then the Total Cost would be $1500

 Many businesses focus on Average Total Cost  Average Total Cost= Divide the Total Cost by the quantity produced  Total Cost= $1500  50 Items are produced  Average Total Cost is $1500 / 50 = $30

Marginal Cost  Is the extra, or additional, cost of producing one additional unit of output  Total Cost= $1500 to Produce 30 bicycles  Total Cost= $1550 to Produce 31 bicycles  What is the Marginal Cost?  $1550-$1500= $50 this is the Marginal Cost or the additional cost to make that extra 31 st bicycle