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Opportunity Cost

Opportunity Cost. The road not taken…. Economics is about choice…. We need to choose how to spend our scarce resources effectively and efficiently But what happens when we finally make that choice?. Every choice has a benefit and a cost.

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Opportunity Cost

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  1. Opportunity Cost The road not taken…

  2. Economics is about choice… • We need to choose how to spend our scarce resources effectively and efficiently • But what happens when we finally make that choice?

  3. Every choice has a benefit and a cost • You choose to spend $10 on a CD instead of a movie ticket • Benefit: now you can listen to the CD • Cost: $10 • Opportunity cost: you cannot go to the movie

  4. Opportunity Cost is… • The value of the alternative that we give up, when we make a choice • Time after school: watching TV or playing road hockey • Whichever action you choose, you give up the opportunity to do the other.

  5. Opportunity Cost • Your top three vacation destinations in order of preference #1 is Australia, #2 is Europe, and #3 is India • You win an all-expenses paid trip anywhere in the world! • Choice: a trip to Australia • Opportunity Cost: a trip to Europe (not India too) • Opportunity cost refers to the lost value of only the next-best alternative

  6. Big Mac Meals or Maple Leaf Tickets? • You have $100 in your entertainment budget • You love Big Mac’s, but also enjoy seeing hockey games • Big Mac meals cost $10, a Leafs ticket is $20 • How many Big Mac’s and how many hockey games will you buy?

  7. Possible combinations Big Mac’s cost $10 Leafs tickets cost $20 For every hockey game you choose, you give up the opportunity of having two big mac meals.

  8. The budget line represents all possible combinations of our two choices • A point ABOVE the line is not possible given the resources we have

  9. A point below the line is possible, but not the optimum use of resources

  10. A point on the budget line illustrates an optimal use of resources

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