Opportunity Cost

Trade-offs The act of giving up one benefit in order to gain another, greater benefit. – What are some examples of a trade-off?

Opportunity cost The most desirable alternative given up as the result of a decision Even simple decisions carry opportunity costs. 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 ski trip?

Thinking at the margin Many decisions involve adding or subtracting one unit, such as one hour or one dollar. From an economist’s point of view, when you decide how much more or less to do, you are “thinking at the margin.” How much would you pay for a pair of jeans?

Cost-benefit analysis A decision-making process in which you compare what you will sacrifice and gain by a specific action. – Marginal Cost: the extra cost of adding one unit – Marginal benefit: the extra benefit of adding one unit.

Decision-making at the Margin Marginal costs and benefits can be compared more easily in the decision-making process when they are laid out in a chart. Consider the opportunity costs of the decision in the “wake up” thought exercise: Enjoy more sleep Have more energy during the day Better grade on test Teacher/Parent approval Personal satisfaction Better grade on test Teacher/parent approval Personal satisfaction Enjoy more sleep Have more energy during the day Sleep Late Wake up early to study Benefits Forgone

Pop Quiz! Why do all economic decisions involve trade- offs?

Why do many economic decisions involve thinking at the margin?

Why is it important to compare marginal costs to marginal benefits?

What marginal costs or benefits might a business owner have to consider when trying to decide whether to hire one, two, or three additional workers?