1. Economics for Leaders I have with me at this EFL program a new Dell Vostro 13 Notebook computer. It has 13” screen, DVD drive, 500 GB hard drive, 4 GB Ram, i5 processor, windows 7, internal wireless, etc. Questions: It is mine. How much money would you give me for the computer? (You have until the end of the week to come up with the cash) ________ I have applied for a grant to study cigarette tax policies across the different states of the United States. To perform this project punctually, I will probably have to hire some research assistants. This work will have to be performed during the next 30 days. (at your home) The work will include data collection, research, and data coding. Questions: 2.How many hours would you work total over that time period? (next 30 days) if I paid you $35 per hour 3. I will probably undertake the project even if I do not get the grant. How many hours would you be willing to work if I paid you $10 per hour?

2. Economics for Leaders Lesson 2: Opportunity Cost & Incentives

3. Economics for Leaders Economic Reasoning Principle #1: People choose, and individual choices are the source of social outcomes. Scarcity necessitates choices

4. Economics for Leaders How Do You Know When Scarcity Forces You to CHOOSE Something Is Scarce? SCARCITY CHOICE

5. Economics for Leaders Economic Reasoning Principle # 2: Choices impose costs; people receive benefits and incur costs when they make decisions. The cost of a choice is the value of the next-best alternative foregone.

6. Economics for Leaders Opportunity Cost: the value of the next best or foregone alternative Think: “next-best”

7. Economics for Leaders Opportunity Cost =the value of the Next-Best Alternative – What are the considered alternatives? What would you do – not what could you do? What does the decision-maker perceive to be the benefits of each alternative?

8. Economics for Leaders Opportunity Cost Analysis What was the 1 st decision you made this morning?

9. Economics for Leaders Opportunity Cost Analysis Alternatives:Get Up NowDon’t Get Up Now Perceived Benefits Choice Opp. Cost Benefits Refused Decision Maker: YOU

10. Economics for Leaders Opportunity Cost Analysis Alternatives:Get Up NowDon’t Get Up Now Perceived Benefits Shower bkfst don’t rush On time coffee Choice Opp. Cost Benefits Refused Decision Maker: YOU More sleep

11. Economics for Leaders Opportunity Cost Analysis Alternatives:Get Up NowDon’t Get Up Now Perceived Benefits Shower bkfst don’t rush On time coffee Choice X Opp. Cost Benefits Refused Decision Maker: YOU More sleep X

12. Economics for Leaders Choosing is Refusing Every time we choose we pay a cost.

13. Economics for Leaders People’s Choices are always RATIONAL Rational choice = choosing the alternative that has the greatest excess of benefits over costs. If ALL choices are rational, then the challenge is to understand the decision- maker’s perception of costs and benefits.

14. Economics for Leaders

15. Characteristics of Cost Costs are the results of ACTIONS Costs are TO people; things have no cost All costs lie in the FUTURE (past costs are “sunk” costs) Costs are frequently not monetary (although we may value them in dollar terms)

16. Economics for Leaders What Determines Your Opportunity Cost? Alternatives Tastes and preferences (values) Rules of the Game--Institutions

17. Economics for Leaders Do Gov’t actions have opportunity costs? Government Debt Economic Stimulus Package War in Iraq Limiting Carbon Emissions Universal Healthcare All alternatives have cost and benefits Individuals perceive the value of costs and benefits differently

18. Economics for Leaders Should we Allocate? ration? Given that we MUST ration, what is the best mechanism? Back to Scarcity: What’s the Question? (And what does opportunity cost have to do with it?)

19. Economics for Leaders Allocating/Rationing DVDs

20. Economics for Leaders Methods of Rationing Scarce Goods and Services prices command (someone decides) majority rule contests by force voting first-come-first- served sharing equally lottery personal characteristics need or merit

21. Economics for Leaders Why is price rationing the most common method of allocating scarce goods, services, and resources in our economy? 1.The outcome is clear 2.Individuals can affect the outcome based on their desire for the product 3.It directs resources to their most highly valued uses 4.Individuals’ power and freedom is enhanced 5.It provides incentives for both consumers and producers to reduce scarcity.

22. Economics for Leaders Where do Prices Come From? The market interaction of buyers and sellers in open and competitive markets!

23. Economics for Leaders Prices: POWERFUL Incentives When prices change, opportunity costs change – that’s an incentive! Both consumers and producers react to prices in ways that help us to deal with scarcity.

24. Economics for Leaders Economic Reasoning Principle # 3: People respond to incentives in predictable ways. Choices are influenced by incentives, the rewards that encourage and the punishments that discourage actions. When incentives change, behavior changes in predictable ways.

25. Economics for Leaders When incentives (Prices) change, behavior changes in predictable ways. When prices go up consumers demand a larger/smaller quantity? Demand The willingness and ability to purchase goods and services at various prices.

26. Economics for Leaders When incentives (Prices) change, behavior changes in predictable ways. When prices go up consumers demand a larger/smaller quantity? Smaller When prices go down consumers demand a larger/smaller quantity? Larger Always? Law of Demand P Q

27. Economics for Leaders When incentives (Prices) change, behavior changes in predictable ways. When prices go up producers supply a larger/smaller quantity? Supply Producers willingness and ability to produce goods and services at various prices.

28. Economics for Leaders When incentives (Prices) change, behavior changes in predictable ways. When prices go up producers supply a larger/smaller quantity? Larger When prices go down producers supply a larger/smaller quantity? Smaller Always? Law of Supply P Q

29. Economics for Leaders What does Opportunity Cost have to do with supply and demand? Everything!

30. Economics for Leaders Choices are made at the Margin Our only choice is the next choice Marginal = additional, next, a little more or a little less

31. Economics for Leaders How much should we do? Work Play Study Sleep Buy Sell

32. Economics for Leaders As long as the marginal benefit is greater than the marginal cost you should continue the activity MB=MC

33. Economics for Leaders The “Big Ideas” from Lesson 2: 1.Scarcity forces us to choose and every choice has an opportunity cost. 2.When opportunity costs change, incentives change, and choices change. 3.Because costs lie in the future, the important costs and benefits occur at the margin. 4.Money price rations goods in markets. 5.Consumers and producers respond to changes in price in predictable ways.