Transcript Economic Choice Today: Opportunity Cost

Chapter 1—Section 2--- pages 12-17
ECONOMIC CHOICE TODAY:
OPPORTUNITY COST
Section 2 Objectives
 understand why choice is at the heart of
economics
 explain how incentives and utility influence
people’ economic choices
 consider the role of trade-offs and
opportunity costs in making economic
choices
 demonstrate how to do a cost-benefit
analysis
Making Choices
 Key Concepts:
 Incentives are the benefits offered to
encourage people to act in certain ways.
Example: reward cards, loyalty cards
 Utility: benefit or satisfaction gained from the
use of a good and service. When people
economize, people consider both incentives
and utility. Example: coupons, comparison
shopping.
Making Choices Continued
 Economize: Consumers and producers make
decisions according to what they believe is the
best combination of costs and benefits.
 Making Choices: How will you spend time with a
friend?
 Quote from Oprah Winfrey: “It’s much easier for
me to make major life, multi-million dollar
decisions, than it is to decide on a carpet for my
front porch.”
 What makes some decisions easy and some
more difficult?
Making Choices Continued
 Factor 1- Motivations for Choices : The
choices people make are shaped by
incentives, by expected utility, and by the
desire to economize. Example: Attending a
dinner to discuss ideas for a business venture
along with spending time with a friend.
 Factor 2-No Free Lunch: Every choice
involves cost. Cost can take the form of
money, time, or some other thing you value.
“Ultimatum Game”
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Task: Play the economic “ultimatum game”
in pairs.
Activity:
I will divide you into pairs, designate one person will
be Player A the other Player B. Just imagine you
have been given $ 10. Player A has the right to make
an offer about a way to split the money. If Player B
accepts the offer, both players get to keep the
money. If the offer is rejected, they get nothing. You
get 5 minutes to play.
 Each group will discuss the result of their
“negotiations” to the rest of the class. Tie your
results to the material on page 12 and13.
Outcome
 What is the roles of reason and emotion in
the various outcomes. Sometimes it’s about
rational self-interest could be the sole force
behind economic decisions.
Consider
 You have enough money to purchase an IPod
that has an discount offer or some fitness
equipment you need for a class or job. What
incentives and utility would guide your
decision?
Trade-Offs and Opportunity
Cost
 Key Concepts
 Trade-off: in a trade off it’s not all or nothing
choice. It is about giving up some of one thing
to gain more of another.
Economics Illustrated
 Making a choice and accepting trade-offs is like
choosing the scenic route or the highway when
you’re on a car trip. When you take the scenic
route, you get the advantage of seeing forests,
mountains, and maybe even some wildlife.
However, it takes much longer to get to your
destination. The highway takes you directly to
your destination quickly, but all you’ll see along
the way is concrete and other cars. This example
also illustrates that the choice is not all or
nothing: both routes get you to final destination.
Example 1: Making Trade-Offs
 The example the book gives about Trade-offs
in making decisions. Shanti is finishing her
junior of high school and would like extra
credit . She has to choose between a
semester class at the local university or an
intense six week course at the local high
school. Shanti makes the decision to take the
six week course, take fewer credits, but ends
up with some free time at the end of summer.
Example 2:Counting the
Opportunity Cost
 Opportunity Cost: a decision is the value of
the next best alternative, or what you give up
by choosing one alternative over another.
 Application: Applying Economic Concepts
 Look again at Shanti’s decision. What was the
opportunity cost of her choice? If she had
chosen the semester course, what would her
opportunity cost have been?
Key Concepts
 Cost-benefit analysis: is examining the costs and
the expected benefits of a choice as an aid to
decision making. Looking at the book examples
of Shanti and Dan they looked at the benefits
they would gain and the opportunity costs that
would happen from their decisions.
 Cost –benefit analysis can be useful for
businesses, individuals, and governments when
they need to evaluate the worth of economic
choices.
Example: Max’s DecisionMaking Grid
 Analyzing Grids: Figure 1.2
Point out that this is an example of an economic
model, which students will learn more about
later in this chapter. Economic models
simplify the issues at hand, often by reducing
the terms to only two variables in this case is
studying and spending time with friends, in
order to see key relationships.
Analyzing Choices
 What examples from their own lives can
students think of to demonstrate a decisionmaking process like Max’s?
 What local, state, or federal government
policies are generating current debate?
Consider how policy makers decide among
alternative solutions to problems. Part of the
rules of policy decisions is that a change must
make at least one person better off and also
leave no one worse off. Example: Pell Grant
Example: Marginal Costs and
Benefits
 Marginal Cost: additional cost of using one
more unit of a product.
 Marginal benefits: refers to the benefit or
satisfaction received from using one more
unit of a good or service.
Your Economic Choices
 Marginal Benefits and Costs:
 Which will you do-basketball practice or
after-school job?
 Application: Using a Decision-Making
Process: Look at Your Economics Choices
above. Construct a decision-making grid that
analyzes the potential choices of attending
basketball practice and working at an after –
school job. Which option would you choose?