Opportunity Cost, Marginal Cost, and Marginal Benefit

Opportunity Cost, Marginal Cost, and Marginal Benefit

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Chapter 1, Opener

Introduction

• How does opportunity cost affect decision

making?
– Every time we choose to do something, like

sleep in late, we are giving up the opportunity
to do something less, like study an extra hour
for a big test.

– When we make decisions about how to spend

our scarce resources, like money or time, we
are giving up the chance to spend that money
or time on something else.

Open Ended

What decision did you make today and what was the opportunity cost?

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Chapter 1, Opener

Trade-offs

• 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 or things that cannot be easily
measured, like enjoyment or job
satisfaction.

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Opportunity 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.

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Chapter 1, Opener

Businesses and Governments

• Businesses make trade-offs

when they decide how to use
their factors of production.

– A farmer who uses his or her

land to plant broccoli, for
example, cannot use that
same land to plant squash.

• Governments also make

trade-offs when they decide to
spend their money on military
needs instead of domestic
ones, and vice versa.

Open Ended

Come up with 4 pros and cons (2 pros, 2 cons) for the last purchase you made.

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Thinking on the Margin

• When you decide how much more or less

to do, you are thinking on the margin.

– Deciding by thinking on the margin involves

comparing the opportunity costs and benefits.

– This decision-making process is called a

cost/benefit analysis.

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Marginal Costs and Benefits

• 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 building one extra
house.

– The marginal benefit is the extra benefit of adding the

same unit.

• Once the marginal costs outweigh the marginal

benefit, no more units can be added.

• When does work become counterproductive?

Open Ended

What is an example of a time where you saw more people, money, resources, etc. became counter productive? Explain.

Multiple Choice

Which is not relevant when thinking at the margin?

• Opportunity Costs

• Benefits

• Cost

• Time for a change

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Chapter 1, Opener

Cost/Benefit Analysis

• The cost/benefit analysis below shows the opportunity

costs and benefits of extra hours of sleep against extra
house of study time.
– What is the opportunity cost of one extra hour of sleep? What is

the benefit?

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Chapter 1, Opener

Decision-Making on the Margin

• Like opportunity cost, thinking at the

margin applies not just to individuals, but
to businesses and governments as well.

– Employers think at the margin when they

decide how many workers to hire.

– Legislators think at the margin when they

decide how much to increase government
spending on a particular project.

Multiple Choice

Which one of these definitions best describe Opportunity Costs?

• The cost of making one decision over another.

• The cost for the opportunity to buy anything you want.

• The opportunity that will cost you loads of money.

Multiple Choice

Alex is studying for his math quiz, but his favorite TV show just started. If he studies for the quiz, he will miss out on watching the show. Alex decides not to watch the show and continue studying for the quiz. What is the opportunity cost of his decision?

• studying for a quiz

• watching TV

• eating dinner

• taking a nap

Multiple Choice

Tom was shopping for a car. He has looked at a Ford, Honda, Toyota, and Dodge. After a lot of debate, he narrowed it down to either the Ford or the Honda. He selected the Ford, because he liked the interior a little better. What was his opportunity cost?

• Ford

• Honda

• Toyota

• Dodge

Multiple Choice

What is marginal cost?

• the change in profit resulting from an action

• is the change in total benefit resulting from an action

• is the change in total cost resulting from an action

• is the change in your options resulting from an action

Multiple Choice

What does effective decision making require?

• wisdom

• comparing your expenses and your income for each choice

• comparing the additional costs (marginal costs) and additional benefits (marginal benefits) for each choice.

• comparing additional revenue and additional profits for each choice

Multiple Choice

A consumer sees a buy one get one half off sale for glasses. The first pair of glasses are $300. The second pair will be $150. The glasses cost $175 each to make. Is this marginal cost or marginal benefit?

• Marginal Benefit

• Marginal Cost

Multiple Choice

A consumer walks into a gaming store. The consumer would like to purchase Madden NFL 23. Madden NFL 23 is $70. The manager tells the consumer that if another game is purchased she will sell it to them for $35. Each game cost $25 to make. Is this marginal cost or marginal benefit?

• Marginal Benefit

• Marginal Cost

Multiple Choice

You made a good decision if:

• Marginal cost is greater than marginal benefit

• marginal benefit is less than marginal cost

• Marginal benefit is greater than marginal cost

• if you listened to Coach Dent