Using the CEO Method: C OMMUNICATION, E DUCATION, O PPORTUNITY
O PPORTUNITY COST. D EFINITIONS Consequence – something that logically or naturally follows from...
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Transcript of O PPORTUNITY COST. D EFINITIONS Consequence – something that logically or naturally follows from...
![Page 1: O PPORTUNITY COST. D EFINITIONS Consequence – something that logically or naturally follows from an action or condition. For example, if you stay out.](https://reader035.fdocuments.us/reader035/viewer/2022062322/56649ee05503460f94befeb3/html5/thumbnails/1.jpg)
OPPORTUNITY COST
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DEFINITIONS
Consequence – something that logically or naturally follows from an action or condition. For example, if you stay out past your curfew, you will be grounded.
Opportunity Cost – the best alternative that is forgone because a particular course of action is pursued. For example, buying an expensive iPod Nano means you'll have less money to spend on fun weekend activities.
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DEFINITIONS
Trade-off – an exchange of one thing in return for another, especially relinquishment of one benefit or advantage for another regarded as more desirable. For example, you want both a new outfit and a new and a class ring. You forgo the outfit for something that will last longer.
Decision-making – process by which consumers identify their needs, collect information, evaluate decisions and make or act on a decision. For example, you are going to purchase a car. First, list your needs (get to school, practice, must be safe, reliable, affordable, etc.); then you shop around (on Internet, in car dealerships, etc.); list the pros and cons to each car you find; buy your car. Explain how tradeoffs are associated with decision-making.
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EXAMPLE 1
Tennis coach might videotape a tennis player's stroke and then study it frame by frame
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JIM IS ABOUT TO PURCHASE A CD OF HIS
FAVORITE SINGER
Benefit -- hours of pleasure from listening to them
Cost -- price tag it costs $15
Alternatives
Listen to radio
Download song
Borrow CD
Determine if the benefits exceed the cost
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WOMAN WALKING ALONG THE STREET WHEN SHE SEES A $1
BILL ON THE SIDEWALK. SHOULD SHE PICK IT UP?
Benefit -- $1 richer
Cost – 0 dollars
Alternative – What if the woman is Madonna, and she is hurrying to a recording studio where a symphony orchestra is waiting to perform with her
Determine if the benefits exceed the cost
Do something if it’s benefits outweigh its opportunity costs.
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TO CALCULATE IT ASK YOURSELF THREE
QUESTIONS
1. What alternative opportunities are there?
2. Which is the best of these alternative opportunities?
3. What would I gain if I selected my best alternative opportunity instead of the choice I'm considering?
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JIM IS ABOUT TO PURCHASE A CD OF HIS
FAVORITE SINGER
Benefit -- hours of pleasure from listening to them
Cost -- price tag it costs $15
Alternatives (other ways to spend the $15)
Sunglasses
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CONSIDER A GOVERNMENT PROPOSAL
TO BUILD A NEW DAM
Here's how a poor decision-maker might view the problem
"If we build a dam, we'll have better flood control and cheaper electricity.
If we don't, then we'll experience occasional flooding, and electricity will be more expensive."
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HERE'S ANOTHER WAY OF PRESENTING THE
PROBLEM:
"If we build the dam, it will provide us with flood control and cheaper electricity, but it will cost us $100 million."
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HERE'S HOW AN ECONOMIST WOULD VIEW
THE PROBLEM:
"If we build the dam, we'll have flood control and cheaper electricity. But the $100 million to build the dam could be used instead to build two new high schools."
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OPPORTUNITY COST OF GOING TO A
MOVIE
Time to do homework: 3 hoursGas and parking: $1.50Admission to the theater: $2.00_______________________________________
Opportunity Cost: 3 hours and $3.50