Trade-offs and Costs

I. Trade-offs and Opportunity Costs a. Trade-off=all of the alternative (other) choices in a decision  these could be clothes, college, vacation, etc. Ex: With $18,000 you could buy new clothes, save money for college, go on vacation …If you spend the money on clothes, the trade-off is money for college and vacation

1. Trade-off Practice: If you had $10 to spend, and you spent it on a meal at Bojangles. What are some trade- offs? 2. Trade-off Practice: You have 2 hours of free time. You decide to take a nap. What are some trade-offs?

b. Opportunity cost=the NEXT best use of your time or money Ex 1: Lets to back to the first example: With $18,000 you could buy new clothes, save money for college, go on vacation …If you spend the money on clothes, the trade-off is money for college and vacation. …The Opportunity cost will be the best trade-off. I think money for college would be the next best use of my money. So the opportunity cost would be saving money for college.

SO….. With $18,000 you could buy new clothes, save money for college, go on vacation. The order to me is: 1. Buy a car 2. Save money for college 3. Vacation I would choose to buy a car and: The trade-offs are: saving money for college, and a vacation The opportunity cost is: Saving money for college

Ex 2: The trade offs of sleeping is that you don’t have time to study, you don’t have time to watch TV, and you don’t have time to cook dinner. Which is the opportunity cost? Is everyone's the same? c. Monetary Cost=what something costs in dollars

3. Finding Opportunity Costs: If you have an hour of time, list 3 things you would do with it. Which one is the opportunity cost?

3. Finding Opportunity Costs: If you have an hour of time, list 3 things you would do with it. Which one is the opportunity cost? 1. Study for EOC 2. Take a nap 3. Watch TV

d. True Costs=when you buy something, the true cost of the good or service is… Monetary Cost + Opportunity Cost = True Cost -Ex: You want to buy a new car. Monetary Cost $18,000 Opportunity Cost College True Cost$18,000 AND a College Education

4. True Cost Scenarios: You decide to go to college for $17,500 for UNC-Chapel Hill. You will attend for 4 years ($70,000). During this time, you must spend time studying, attending class, and can’t have a full-time job.  THINK: What is the NEXT best thing you would do if you didn’t go to college? Monetary Cost Opport. Cost True Cost

4. True Cost Scenarios: You decide to go to college for $17,500 for UNC-Chapel Hill. You will attend for 4 years ($70,000). During this time, you must spend time studying, attending class, and can’t have a full-time job.  THINK: What is the NEXT best thing you would do if you didn’t go to college? Monetary Cost Opport. Cost A full time job True Cost $70,00 + having a full time job

4. True Cost Scenarios: You decide to go on a summer vacation for $2,500 to Mexico. The trip is the entire summer and you are unable to get a summer job.  THINK: What is the NEXT best thing you would do if you didn’t go on vacation? Monetary Cost Opport. Cost True Cost

4. True Cost Scenarios: You decide to go on a summer vacation for $2,500 to Mexico. The trip is the entire summer and you are unable to get a summer job.  THINK: What is the NEXT best thing you would do if you didn’t go on vacation? Monetary Cost Opport. Cost A summer job True Cost $2,500 + having summer job

II. Business Costs Like a person, a business has different types of costs when operating a business a. Fixed Costs=costs that DO NOT depend on how many goods or services a business produces -FIXED=SAME -Ex: Rent for a factory, salary for employees

5. Let’s illustrate what fixed costs mean: -When 500 people come in one day RENT Employees Minimum Amount of Product -When 200 people come in one day RENT Employees Minimum Amount of Product

b. Variable Costs=costs that DO depend how many goods or services a business produces (the level of production) -VARY=CHANGE -Ex: Subway receives a lot of customers one day and must pay employees overtime to make more sandwiches

6. Variable costs at Subway Normal Day:Busy Day:

c. Marginal Cost=the cost of producing one additional unit of a good or service -Ex: It costs a bike company $1500 total to produce 30 bike helmets. It costs $1550 total to produce 31 bike helmets. BikesTotal CostMarginal Cost 30$1500( )=$50 31$1550

7. Marginal Cost Example: It costs a Snickers factory $600 total to produce 300 Snickers total. It costs them $602 total to produce 301 Snickers. What is the marginal cost?

8. Marginal Cost Example: It costs a Shoe factory $500 total to produce 50 pairs of shoes total. It costs them $550 total to produce 51 pairs of shoes. What is the marginal cost?

8. Fixed, Variable, or Marginal Costs: (F, V, M) Rent- overtime pay- Changes- cost of one more- Additional unit- worker salaries- Stays the same- electricity bill- Car payment- cost of fuel- Cost of shipping-

8. Fixed, Variable, or Marginal Costs: (F, V, M) Rent- Fixed overtime pay- variable Changes- Variable cost of one more- marginal Additional unit- Marginal worker salaries- fixed Stays the same- Fixed electricity bill- fixed Car payment- Fixed cost of fuel- variable Cost of shipping- Variable

III. Business Benefits a. Marginal Benefit=the benefit (increase in $) from producing one additional unit of a good or service. -Ex: A bike helmet company sold 30 bike helmets for a $1600 in total profit. It sold 31 bike helmets for $1651 in total profit. BikesTotal ProfitMarginal Benefit 30$1600( )=$51 31$1651

9. How do we remember whether it is marginal cost or marginal benefit? Marginal cost= Marginal benefit= 10. Marginal Benefit Example: The Snickers factory makes $800 total profit when it sells 300 Snickers bars. It makes $804 dollars when it sells 301 Snickers bars. What is the marginal benefit?

10. Marginal Benefit Example: The shoe factory makes $800 total profit when it sells 30 pairs of shoes. It makes $850 dollars when it sells 31 pairs of shoes. What is the marginal benefit?

IV. Cost-Benefit Analysis -This compares the marginal cost (MC) and the marginal benefit (MB) in a decision. -If the MB > MC, it is a good decision to produce more Bike Scenario Example: MC of 31 bikes=$50, MB of 31 bikes=$51 So is it a good decision to make more? The bike factory is making money so…

11. Cost-Benefit Analysis Example with Snickers: It costs a Snickers factory $600 total to produce 300 Snickers total. It costs them $602 total to produce 301 Snickers. What is the marginal cost? The Snickers factory makes $800 total profit when it sells 300 Snickers bars. It makes $804 dollars when it sells 301 Snickers bars. What is the marginal benefit? Marginal Cost= Marginal Benefit= Should we produce 300 or 301 Snickers?

11. Cost-Benefit Analysis Example with Shoes: It costs a shoe factory $400 total to produce 20 pairs of shoes total. It costs them $450 total to produce 21 pairs of shoes total. What is the marginal cost? The shoe factory makes $800 total profit when it sells 20 Snickers bars. It makes $875 dollars when it sells 21 pairs of shoes. What is the marginal benefit? Marginal Cost= Marginal Benefit= Should we produce 20 or 21 pairs of sneakers?

11. Cost-Benefit Analysis Example with Shoes: It costs a soda factory $300 total to produce 400 cans of soda total. It costs them $335 total to produce 401 cans of soda total. What is the marginal cost? The soda factory makes $500 total profit when it sells 400 cans of soda. It makes $525 dollars when it sells 401 cans of soda. What is the marginal benefit? Marginal Cost= Marginal Benefit= Should we produce 400 or 401 cans of Soda?

Practice 1. If you buy a new CD and as a result you cannot afford to buy a stereo to play it on, economists would say this is a good example of which of the following? a.Opportunity cost b.Experience gain c.Marginal Cost d.Denial

Practice 2. If your city made a trade-off to spend $1 million on a recycling facility instead of a community college, what would be the opportunity cost of a cleaner environment? a.Fewer fit and healthy people b.Fewer colleges c.Less garbage to dispose of d.Fewer employed people

Practice 3. Amy is invited to a party and has basketball tickets for the same night. If she decides to go to the basketball game what is her opportunity cost? a.Money spent on food for the party b.The memories from the basketball game c.Money spent on the basketball tickets d.The experience of the party

4. Which is the best example of a fixed business cost? a.Rental payment b.Cost of fuel c.Cost of natural resources d.profit

5. Which is the best example of a variable cost? a.Rental payment b.Car payment c.Shipping payment d.Workers’ salary

6. Which of the following is the best example of immediate gratification? a.Spending a rare coin on a movie ticket instead of waiting to sell the coin to a coin collector. b.Buying the most efficient water heater c.Deciding to eat out later rather than eating at home sooner d.Taking a high paying job instead of one with more vacation time

7. Which of the following is an example of a business increasing its investment in capital? a.Shoe company purchases new machinery b.A shoe company purchases more fuel for transportation c.A shoe company purchases more land for its expansion d.The entrepreneur gives himself a raise.

8. What is known as the money it takes to produce one additional good as a business owner? a. Marginal cost b. Marginal benefit c. Cost-Benefit analysis d. Total cost

9. If a company is trying to decide whether or not to produce 1 additional car, which of the following would they most likely consider? a.Fixed vs Variable costs b.Wages vs salary c.Households vs firms d.Marginal costs vs benefits