Fundamentals of Economics
Unit 1 – Ln 2 – Opportunity Cost
Mr. Mable
Econ 6120
How to think like an economist.
What word do you think of when you hear
the word “economics”?
The economic way of thinking.
Core Economic Principles
1. People make choices.
2. All choices have costs.
3. People respond to incentives in
predictable ways.
4. Economic systems influence incentives
5. Consequences of choices lie in the future.
6. Voluntary exchange creates wealth.
Limited resources vs Unlimited wants
Scarcity
The underlying concept in economics.
Day 2 - What's the trade-off?
What's my opportunity cost?
Scarcity necessitates choice.
Opportunity Cost
is what you give up when you choose.
It’s the real cost.
opportunity cost
Two Roads Diverged in a
Wood…
• http://www.youtube.com/watch?v=DEMDQ
SatfTU
• Robert Frost
• What is the meaning of this Poem?
opportunity cost, trade-offs
How to calculate opportunity
cost?
• http://www.youtube.com/watch?v=VZrNbH
Ckv6A&feature=related
TRADE-OFFS
Econ Videos
Paul Solman on Opportunity Cost and costs
and benefits
• http://www.youtube.com/watch?v=tk5E8aVlgM&feature=related
http://www.youtube.com/watch?v=PNRObcLBpVM&playnext=1&list
=PL3F69F2C6DADE7D1C&feature=results_main
Opportunity Cost
• The opportunity cost of a choice is the
value of the best alternative given up.
• Reading: “Getting the Most Out of Life:
The Concept of Opportunity Cost”
• http://www.econlib.org/library/Columns/y20
07/Robertsopportunitycost.html
• Video
• “Freddie Has to Make Up His Mind”
• http://www.youtube.com/watch?v=bgDUK
0lBhrI
• “Saving Private Ryan” – DVD – Chapter 9
• Captain Miller discusses the cost of saving
Ryan in terms of lives lost.
• Consumers face scarcity and must make
choices and incur opportunity costs. For
example, a consumer with two hours of
free time cannot go ice skating for two
hours and see a movie. Whatever choice
is made, the alternative given up is the
opportunity cost.
• Businesses face scarcity and must make
choices and incur opportunity costs.
Suppose a grocery is deciding whether to
add a café or a pharmacy. It only has
space for one. It makes a choice; the one
not selected is the opportunity cost.
• Governments face scarcity and must make
choices and incur opportunity costs. For
example, money spent on roads cannot be
spent on education—or whatever would be
the next best alternative.
• A tradeoff is not an all-or-nothing decision.
For example, government could choose to
trade off some money for roads to spend
more on education.1
Cost-Benefit Analysis
What are the costs? What are the benefits?
(What benefits do you give up?)
(What good things do you get?)
• What is the difference between what a
government does and what an economy
does?
What 3 Basic Questions do all
economies have to answer?
• What to produce?
• How to produce?
• For whom to produce?
What are the main types of economies?
Who owns the resources?
Who decides?
Main Types of Economies
• Command
• Market
• Tradition
• Mixed
Why are some nations rich and others poor?
Which of these nations do you think is the
wealthiest?
A
B
C
D
E
Hans Roslings:
Four Minutes 200 years
http://www.youtube.com/watch?v=jbkSRLYSojo
What characteristics do wealthy
nations have in common?
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•
•
•
•
•
•
•
•
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Investments in human and physical capital
Economic freedom
Lower taxes
Less government regulation
Sound monetary policy
Protection of property rights
Incentives to save, invest, increase productivity
Competitive markets
Low inflation
Political stability