Every Choice Has a Cost There is no such choice as a free choice.

Every Choice Has a Cost

There is no such choice

as a free choice

Objectives

• Define alternatives as different ways to achieve a goal

• Identify the opportunity cost of choosing between alternatives

04/20/23 Lesson 2: Cost 3

OPPORTUNITY COST The Cost of a Choice

• What will you (did you) give up when you made a decision?.

• Things don’t have costs, choices do.

• Perhaps the most important concept in economics

A Truism


• When people choose between two alter alternatives, they select one and give up the other.

Hamburger or Spicy Chicken?

You want them both but can have only one.


• You choose the spicy chicken.

• The cost of the choice is the hamburger; you gave it up!

Hamburger or Spicy Chicken?

Consumption Choices

Anytime you decide between consumer goods, you pay a cost

--- the best alternative not selected.


Using a resource


• You are a high school principal and you have just hired a new social studies teacher who, you are sure, is VERY good.

• For 3rd period, you can give him an AP Econ class or the rowdy government class which you are sure he could control.

• You choose to give him the AP Econ class.• What is the choice?• What opportunity did you give up? What is the

opportunity cost of your choice?


Preserving the environment is costly.

Using a Resource: Alaskan Land

04/20/23 Lesson 2: Cost 10

What is your choice and what is the opportunity cost?

04/20/23 Lesson 2: Cost 11

How to best use their human capital on their 3 month

anniversary?

04/20/23 Lesson 2: Cost 12

Some Alternatives

04/20/23 Lesson 2: Cost 13

Narrow it down to two

04/20/23 Lesson 2: Cost 14

Identify the Choice and the Opportunity Cost

CHOICE

OPPORTUNITY

COST

04/20/23 Lesson 2: Cost

Picnic with your friends

A “free” hike in the woods

Hike in the woods OR

A friend has given you two “free” tickets to the 5th game of the 2010 World Series

• There are no other tickets available at any price• This could be the SF Giants first national

championship • You and your best friend have grown up together

suffering through the Giants’ agony of defeat• Your wife has been a Giants fan for years. • You can go with your wife or your best friend. • Is the choice to use the ticket “free?”

04/20/23 Lesson 2: Cost 16

04/20/23 Lesson 2: Cost 17

The “free” tickets

AlternativeYour best friend

AlternativeYour wife

04/20/23 Lesson 2: Cost 18

The “free” tickets

AlternativeYour best friend

AlternativeYour wife

Who do you choose? Who do you reject? Who is your choice? Who is your opportunity cost?Describe the opportunity cost? How will the reject treat you?

04/20/23 Lesson 2: Cost 19

The results of the decision

• Choice: The subjective evaluation of the selected alternative

• Opportunity cost: the subjective evaluation of the best alternative NOT selected– not what COULD have been done but what

WOULD have been done

04/20/23 Lesson 2: Cost 20

Other examples

• Typing a term paper

• “Free parking”

• Resources for “free” early childhood education

• Resources for national defense

• Reduced class size

• Wildlife habitats

04/20/23 21

Economic Decisions are made with incomplete information

Expectations can be erroneous

04/20/23 Lesson 2: Cost 22

The Curse of the Crawling Camel

• Clyde holds the record• It’s past the record• He sees his salvation

ahead• It is a mirage• There is no such thing as a

free lunch!• Or, more precisely, there is

no such choice as a free choice.

04/20/23 23

Stating that economic choices have an opportunity

cost is the same thing as stating that scarce

resources have alternative uses.

04/20/23 24

Opportunity cost is the value of the best foregone

alternative

at the time that you make the

decision.

04/20/23 Lesson 2: Cost 25

What does it cost you?• You have a scholarship for full

tuition and all books.• There are no money costs to you. • Some say your education is free.• What would you be doing with your

scarce human capital if you weren’t pursuing an education? That is the cost of your education.

There is no such choice as a free choice.

04/20/23 Lesson 2: Cost 27

If you can’t do it, it’s not opportunity cost!

04/20/23 Lesson 2: Cost 28

Opportunity cost is:

• subjective

• determined only by the decision-maker

– Why are you watching television, you could be

outside on such a beautiful day?• TV• Video games• Talking to your girl/boy friend

To identify opportunity cost

• What is the good or resource that is being used?

• What were the two best alternative uses of the good or resource?

• What was selected?

• What was given up?

04/20/23 Lesson 2: Cost 30

ECONOMICS

• Individuals make decisions, not groups

• Economics can’t distinguish needs from wants – needs have no alternatives, therefore no choice, therefore no economics

• In economics, people rank their goals according to their priorities.

04/20/23 Lesson 2: Cost 31

ECONOMICS

• The study of – individual choices– concerning the use of limited resources– among competing goals – Goals, resources, choices, costs

• How do we best use our scarce resources to achieve our goals?

04/20/23 Lesson 2: Cost 32

Which of the following is an opportunity cost?

a. A bad grade on a quiz because you didn’t study

b. Your mother’s hurt because you forgot her birthday

You Scum!

c. Not going out with your friends because you are called in to work.

d. All of the above are opportunity costs.

04/20/23 33

Why would an economist never say, “The best things in

life are free?”

04/20/23 34

Why would an economist never say, “We should

preserve old growth forests at all costs?”

04/20/23 35

An economist would never say, “If it saves one life, it’s worth it,” because it ignores

the concept of ……………………….”

04/20/23 Lesson 2: Cost 36

What does it cost you?

You were in love.You have been

married 30 years.You are still in

love.What has it cost

you?

04/20/23 Lesson 2: Cost 37

Main Points

• People choose because resources are limited and insufficient to achieve all of their goals; people can’t have everything they want.

• An economic decision involves using resources, goods or services

• Every economic decision involves a cost. There is no such choice as a free choice.

04/20/23 Lesson 2: Cost 38

Main Points

• Opportunity cost is subjective and can only be identified by the decision maker.

• When people make a decision, they narrow the alternatives to two, select one (the choice) and give one up (the opportunity cost).

• In a study of economics, needs and wants can’t be distinguished. Economic reasoning ranks goals according to priorities.

04/20/23 Lesson 2: Cost 39

Every Choice Has a Cost There is no such choice as a free choice.

Documents

Transcript of Every Choice Has a Cost There is no such choice as a free choice.