Fundamental Economic ConceptsEconomic Choices and Decision Making Academic Decathlon Lesson 3 Berryhill Economics
Trade-OffsPeople face trade-offs, or alternative choices, whenever they make an economic decision.If I have $15, I can get a CD, or I can get 8 songs on itunesMy parents have $30,000—they can send me to small, private, prestigious school for a year or buy me a nice new SUV
Opportunity CostsAn opportunity cost is the value of a forgone opportunity—the what you have to give up when you make a decision.Most people hear cost and think that it can only be dollars and cents, but costs can be more than a price tag.Ex: what will it cost you to study for 5 hours tonight?
Opportunity costsUtility maximization comes into play here-- -you will do what costs you lessPart of economics is the idea that people, when behaving rationally, will do what they get the most benefit from and that costs them the least.Of course, utility is different for each person, so our decisions will be different.
Opportunity CostsEx: What is your opportunity cost to go to college next year and start your degree? What are you giving up? What would you gain?What would the opportunity cost be for Angelina Jolie (who did not attend college) to quit her job and go back to school next year? What would she be giving up? What would she gain?
Opportunity CostsThis is why most movie and rock stars don’t go to school once their career begins. The costs would outweigh the benefits.By staying in the acting business, Angelina is maximizing her utility—getting the most usefulness or satisfaction from her scarce resource (time)
Economic Decision MakingWe all have scarce resourcesThis scarcity requires us to make choicesBased on our opportunity costsWe will do what gives us the most benefit and costs us the leastThis results in utility maximization