1. Chapter 1 The Economic Way of Thinking
Section 2
Economic Choice Today: Opportunity Costs

2. Economic Choice Today: Opportunity Cost
Section-2
Economic Choice Today: Opportunity Cost
Making Choices
KEY CONCEPTS
Economic choices shaped by
— Incentives — benefits that encourage people to act in certain ways
— Utility — benefit or satisfaction gained from using a good or service
To make choices, people economize:
— make decisions according to best combination of costs and benefits

3. Making Choices Factor 1: Motivations for Choice
People motivated by incentives, expected utility, desire to economize
They weigh costs against benefits to make purposeful choices
— motivated by self-interest: look for ways to maximize utility
Factor 2: No Free Lunch
All choices have a cost
— choosing one thing means giving up another, or paying a cost
— cost can take form of money, time, other thing of value

4. Trade-Offs and Opportunity Cost
KEY CONCEPTS
Trade-off is alternative people give up when they make a choice
— usually means giving up some, not all, of a thing to get more of another
Example 1: Making Trade-Offs
Shanti wants to earn college credit over summer
— semester-long university course offers more credits
— six-week high school course leaves time for vacation
Example 2: Counting the Opportunity Cost
Opportunity cost is value of next-best alternative a person gives up
— not the value of all possible alternatives
Dan chooses to work for six months so he can travel for six months
— opportunity cost: six months of salary

5. Analyzing Choices KEY CONCEPTS Example: Max’s Decision-Making Grid
Cost-benefit analysis — examination of costs, expected benefits of choices
— one of most useful tools for evaluating relative worth of economic choices
Example: Max’s Decision-Making Grid
Decision-making grid shows what one gets, gives up with each choice
Max’s grid shows all possible choices for his free hours each week
— lists choices, benefits and opportunity cost of each choice
With time, costs and benefits change; also goals and circumstances
— Changes influence decisions, make people alter original choices
Example: Marginal Costs and Benefits
Marginal cost
Marginal benefit
— additional benefit of using one more unit of a good or service

6. value of next-best alternative a person gives up Cost-Benefit Analysis
Vocabulary
Incentives
benefits that encourage people to act in certain ways
Utility
benefit or satisfaction gained from using a good or service
Economize
make decisions according to best combination of costs and benefits
Trade-off
alternative people give up when they make a choice
Opportunity Cost
value of next-best alternative a person gives up
Cost-Benefit Analysis
examination of costs, expected benefits of choices
Marginal Cost
lists choices, benefits and opportunity cost of each choice
Marginal Benefit
additional benefit of using one more unit of a good or service