Slide 1Copyright © Pearson Education, Inc.Chapter 1, Section 2

Ch 1 Essential Question• How can we make the best economic choices?

Ch 1.2: Opportunity CostCh 1.2: Opportunity Cost

Slide 2Copyright © Pearson Education, Inc.Chapter 1, Section 2

ObjectivesObjectives

1. Explain why every decision involves trade-offs.

2. Summarize the concept of opportunity cost.

3. Describe how people make decisions by thinking at the margin.

Slide 3Copyright © Pearson Education, Inc.Chapter 1, Section 2

Trade-offsTrade-offs

• Trade-offs are what we give up when we make a decision because resources are limited

• All individuals, businesses, and large groups of people make decisions that involve trade-offs.

• Trade-offs involve things that can be easily measured such as money, property, and time– Tradeoffs include tough to measure things like

enjoyment or job satisfaction.

Slide 4Copyright © Pearson Education, Inc.Chapter 1, Section 2

Opportunity CostsOpportunity Costs

• In most trade-offs, one of the rejected alternatives is more desirable than the rest.

• The most desirable alternative somebody gives up as a result of a decision is the opportunity cost.

• Checkpoint: Why does every choice involve an opportunity cost?– We always face an opportunity cost. When we

select one alternative, we must sacrifice another

Slide 5Copyright © Pearson Education, Inc.Chapter 1, Section 2

Decision-Making GridsDecision-Making Grids• Using a decision-making grid can help you

decide if you are willing to accept the opportunity

cost of a choice you are about to make.– Are you willing to sacrifice the opportunity cost?

Slide 6Copyright © Pearson Education, Inc.Chapter 1, Section 2

Thinking on the Margin: Cost/Benefit AnalysisMarginal Benefit vs. Marginal CostThinking on the Margin: Cost/Benefit AnalysisMarginal Benefit vs. Marginal Cost

• When you decide how much more or less to do, you are thinking on the margin.

– So, you decided to study more. How much more?

– Deciding by thinking on the margin involves comparing the opportunity costs and benefits for each extra unit of resource

• i.e. Benefit/Cost of extra hour of work/study

– This decision-making process is called a cost/benefit analysis.

Slide 7Copyright © Pearson Education, Inc.Chapter 1, Section 2

• To make good decisions on the margin, you must weigh marginal costs against marginal benefits.

– The marginal cost is the extra cost of adding one unit such as sleeping an extra hour or opening one extra store.

– The marginal benefit is the extra benefit of adding the same unit.

Thinking on the Margin: Cost/Benefit AnalysisMarginal Benefit vs. Marginal CostThinking on the Margin: Cost/Benefit AnalysisMarginal Benefit vs. Marginal Cost

Slide 8Copyright © Pearson Education, Inc.Chapter 1, Section 2

• Marginal Benefit > Marginal Cost– You are better off making the decision to use

the next unit of resource– Benefit outweighs cost

• Marginal Benefit < Marginal Cost– Stop using the resource– Cost outweighs benefit

Thinking on the Margin: Cost/Benefit AnalysisMarginal Benefit vs. Marginal CostThinking on the Margin: Cost/Benefit AnalysisMarginal Benefit vs. Marginal Cost

Slide 9Copyright © Pearson Education, Inc.Chapter 1, Section 2

– What is the Marginal Benefit and Marginal Cost of one extra hour of sleep?

– What decision should we make (Remember: MB > MC)• 1st Hour: MB = 1 Letter Grade; MC = 1hr Sleep (MB>MC)• 2nd Hour: MB = 1 Letter Grade; MC = 1hr Sleep (MB>MC)• 3rd Hour: MB = 1/3 Letter Grade: MC = 1hr Sleep (MB<MC)

Thinking on the Margin: Cost/Benefit AnalysisMarginal Benefit vs. Marginal CostThinking on the Margin: Cost/Benefit AnalysisMarginal Benefit vs. Marginal Cost

Slide 10Copyright © Pearson Education, Inc.Chapter 1, Section 2

ObjectivesObjectives

1. Explain why every decision involves trade-offs.

2. Summarize the concept of opportunity cost.

3. Describe how people make decisions by thinking at the margin.

Because of limited resources, we sacrifice/give up something when we make a decision

The most desirable alternative we give up when making a decision

Compare marginal benefits vs. marginal costs. Make decisions if MB > MC

Slide 11Copyright © Pearson Education, Inc.Chapter 1, Section 2

Key TermsKey Terms

• trade-off: the alternatives that we give up when we choose one course of action over another

• “guns or butter”: a phrase expressing the idea that a country that decides to produce more military goods (“guns”) has fewer resources to produce consumer goods (“butter”) and vice versa

• opportunity cost: the most desirable alternative given up as the result of a decision

Slide 12Copyright © Pearson Education, Inc.Chapter 1, Section 2

Key Terms, cont.Key Terms, cont.

• thinking at the margin: the process of deciding how much more or less to do

• cost/benefit analysis: a decision-making process in which you compare what you will sacrifice and gain by a specific action

• marginal cost: the extra cost of adding a unit

• marginal benefit: the extra benefit of adding a unit