COST-BENEFIT ANALYSIS

http://www.econedlink.org/lessons/index.php?lid=347&type=educator

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.

HOW DO WE USE COST BENEFIT ANALYSIS?

OFTEN TIMES WE MAKE A GRID TO HELP US SEE WHAT WE ACTUALLY GAIN AND LOSE

WHEN WE MAKE A CHOICE. WE ARE GOING TO USE THE BELOVED TAIL OF THE THREE LITTLE PIGS TO LEARN HOW TO DO THIS.

BENEFIT OPPORTUNITY COST

STRAW

WOOD

BRICK

LOTS OF TIME TO PLAY

LOST HIS HOUSE;WAS EATEN BY

THE WOLF

DECENT HOUSE; GOOD AMT. OF TIME TO PLAY

LESS TIME TO PLAY; LOST HIS HOUSE;

WAS EATEN BY THE WOLF

REALLY NICE HOUSE; DID NOT

LOSE HOUSE; WAS NOT EATEN

NO TIME TO PLAY

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

APPLES

BENEFIT IN

WAGES

OPPORTUNITY COST:

FREE TIME

OPPORTUNITY COST: WAGES

1 hr.1

BUSHEL OF

APPLES

$7 1 HOUR $14

2 hrs.2

BUSHELS OF

APPLES

$14 2 HOURS $7

3 hrs.3

BUSHELS OF

APPLES

$21 3 HOURS $0

PICKING APPLES

BENEFITTIME

BENEFITMONEY

OPPORTUNITY COST TIME

OPPORTUNITY COST

MONEYWORKING

1 HR.WORKING

2 HRS.WORKING

3 HRS.WORKING

4 HRS.

EXAMPLE