Opportunity Costs

Scarcity & Opportunity Cost

Because of scarcity, we must make choices

With any choice, there are costs & benefits

The Big IdeaOpportunity Cost is the value of

any alternative that you must give up when you make a choice.

It is the value of the opportunity lost

Comparative vs. Absolute Advantage

Comparative Advantage: The ability to produce something at a lower opportunity cost than other producers

Absolute Advantage: The ability to produce something using fewer resources than other producers

What this means for companies &

countries?An individual, firm or country

with the lowest opportunity cost of producing a good should specialize in that good

ExamplesBooks or MoviesShould LeBron James cut his own

lawn?

LeBronLeBron James is both a great basketball player

(who chokes at times) and a great lawn mower. However, LeBron has a young neighbor named Scotty who is willing to mow his lawn.

LeBron can mow his lawn in two hours. He could also film a Nike commercial in two hours and make $10,000. So, James' opportunity cost is???

Neighbor Scotty can mow LeBron's lawn in four hours. He could also work at McDonald's for four hours and make $8 per hour. So, Scotty's opportunity cost of mowing LeBron's lawn is ???

Big ?’sWho has an absolute advantage?Who has a comparative

advantage?Should LeBron & Scotty make a

trade? Can both benefit from the trade?

Other examples of this:We should specialize in what we're

good at and trade with others for other things we want. Such a rule explains why:

1. We generally don't grow our own food.

2. Basketball or football players often specialize in one position as opposed to playing all of them.

3. Your teacher may teach economics, history, and government but likely does not also teach physical education and chemistry.

Big picture ?’sShould a country produce

everything it wants?If Country A is better than

Country B at producing everything, would Country A gain anything by trading with Country B?

When a new home is built, why doesn’t one contractor do everything?