Presentation on theme: "OPPORTUNITY COST: the value of the NEXT BEST ALTERNATIVE, or what you give up by choosing one alternative over another In life, we are forced to make CHOICES."— Presentation transcript:
OPPORTUNITY COST: the value of the NEXT BEST ALTERNATIVE, or what you give up by choosing one alternative over another In life, we are forced to make CHOICES. For every decision you make, you are giving something up. This is called a TRADE-OFF. When we assign a value to this, we call it OPPORTUNITY COST.
WHAT IS COST BENEFIT ANALYSIS? A process of examining the advantages (benefits) and disadvantages (costs) of each available alternative in arriving at a decision.
WHY USE COST BENEFIT ANALYSIS? IT IS ONE OF THE MOST USEFUL TOOLS FOR INDIVIDUALS, BUSINESSES, AND GOVERNMENTS WHEN THEY NEED TO EVALUATE THE RELATIVE WORTH OF ECONOMIC CHOICES.
BenefitsCosts Buy an old car for $2,500. Buy a new car using the $2,500 as a down payment. You have $2,500 to purchase a car. Will you buy an old car or use the money as a down payment on a new car? Fill in the decision- making grid below. What is your decision?
MARGINAL COST: MARGINAL BENEFIT: THE COST OF USING ONE MORE UNIT OF A GOOD OR SERVICE THE BENEFIT OR SATISFACTION OF USING ONE MORE UNIT OF A GOOD OR SERVICE LET’S TAKE A LOOK…
Benefit in time Benefit in wages Opportunity cost: Time Opportunity cost: Wages 1 hour 2 hours 3 hours You have three hours to do with what you like. You need money, so you decide you are going to work, but don’t want to work the whole three hours. You cannot decide how to “maximize your utility” with your time. So, you use the grid below: You still have 2 hours of free time. You still have 1 hour of free time. You have no free time. You have $7. You have $14. You have $21. You are giving up 1 hour of free time. You are giving up 2 hours of free time. You are giving up 3 hours of free time. You are giving up $14. You are giving up $7. You are not giving up any wages.
EXTERNALITIES An EXTERNALITY is a side effect of a transaction which affects someone other than the seller or buyer. Externalities can be either POSITIVE (benefit) or NEGATIVE (cost) to the third party.
A new college built in Hamburg POSITIVENEGATIVE 1.ANOTHER COLLEGE INSTITUTION FOR KIDS TO ATTEND 2.CREATION OF JOBS 3.INCREASE THE TAX BASE 4.NEW CAREERS FOR KIDS TO MAJOR IN 1.INCREASED DESTRUCTION OF THE ENVIRONMENT 2.MORE TRAFFIC
Nuclear waste disposal plant in Hamburg POSITIVENEGATIVE 1.CREATION OF JOBS 2.INCREASE THE TAX BASE 3.GROWING INFLUENCE OF BUFFALO AREA 1.INCREASED DESTRUCTION OF THE ENVIRONMENT 2.MORE TRAFFIC 3.POSSIBILITY OF INCREASED EXPOSURE TO RADIOACTIVE ELEMENTS 4.BIPRODUCTS OF NUCLEAR WASTE PLANTS
How much of a good can be produced The greatest combination of 2 goods The limits of your industry
It’s your trade-offs with money It’s their trade-offs in producing
You are a baker and you have the ingredients to produce the following: Bread in loavesMuffins (per muffin) 120 925 650 375 0100 How might this ppc look?
Hint: It would go in graph form on a graph like this: