Humanity at its’ finest

Unit I: Economics Basics and Market Types Lesson III

Opportunity Cost Opportunity cost is the value of the benefits of the foregone alternative, or the next best alternative that could have been chosen, but was not.

Costs Cost: what is given up to receive a good or service All costs are to someone. Costs are subjective. Individuals may value costs differently. All costs relevant to decision making lie in the future Costs may be anticipated, but only occur after a choice is made. Cost ≠ Consequence

Costs Sunk cost: a retrospective (past) cost that has already been incurred and cannot be recovered. Prospective cost: a future cost that may be incurred or changed if an action is taken. In traditional economic theory, only prospective (future) costs are relevant to a decision

Costs Explicit cost: the actual monetary value given up Ex: The money used for the wages of new employees when a company is working on expanding Implicit cost: The implied cost of using resources already owned Ex: The time and effort that a CEO puts into working on expansion of his company

What is utility? Utility is the total satisfaction received from consuming a good or service In other words it is the benefit Total value for all consumption of a good or service Things that make you happy have high utility Things that don’t have low utility The goal of economists and people is to find the best way to allocate limited resources in order to generate the most utility

The Margin Marginal utility: the additional satisfaction, or amount of utility, gained from each extra unit of consumption. The extra utility gained from one unit of consumption to the next Marginal cost: the cost to produce or consume one more unit of a good or service The extra cost given up for one unit of consumption to the next

Law Of Diminishing Marginal Utility As a person increases consumption of a product there is a decline in the marginal utility that person derives from consuming each additional unit of that product Each extra unit adds less utility (benefit) than the previous Dis-utility: where the benefit you receive is negative Ex: you get sick at an all you can eat buffet

So What? If the marginal benefit is greater than the marginal cost the decision is good You are giving up less value than you are gaining If the marginal benefit is less than the marginal cost the decision is bad You are giving up more value than you are gaining Make your decision when the marginal benefit (utility) is greater than or equal to the marginal cost

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