Economic Costs


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Economic Costs

  1. 1. Costs<br />Direct and Opportunity Costs<br />1<br />
  2. 2. Economics - The study of how we make decisions regarding the use of scarce resources.<br />Scarcity- Anything (resources) that are available in a limited amount or supply.<br />Resource- Something that a country or state can use to its advantage. <br />3 Types of Resources<br />Land- The physical land mass, water, animals, vegetation, minerals etc. <br />2<br />Review<br />
  3. 3. Labour- The population of a country that can produce work or will be able to work in the future. Education and skills are included in this.<br />Capital- Capital is NOT money. It is man made items that are used to produce goods and services. (hammers, factories, buildings, etc.)<br />3<br />Review Cont’d<br />
  4. 4. There are two different types of costs in Economics'.<br />Direct Costsand;<br />Opportunity Costs<br />4<br />Economic Costs<br />
  5. 5. Direct Costs<br />5<br />Direct costs are the price or cost incurred by a buyer to obtain a product. Out of pocket fees. <br />Ex.) If you buy a slurpee the direct costs of the item are:<br />The costs to drive to the convenience store.<br />The cost of the Slurpee.<br />The costs to drive back from the convenience store.<br />Direct Costs<br />
  6. 6. Opportunity Costs<br />Opportunity Cost- the value of the next best possible alternative that is sacrificed when resources are allocated to a specific use.<br />Or<br />What you would have done if you did not make the choice that you did. <br />
  7. 7. Opportunity costs are not always a number.<br />Example- It is Friday night and I have a bunch of different activities that I could do.<br />Go to the movies<br />Stay home and watch the baseball game<br />Go out for coffee<br />If I choose to go to the movies, then my opportunity cost would be either option b or c.<br />7<br />Opportunity Costs<br />
  8. 8. Opportunity costs analyzes only the next best alternative not a whole set of alternatives.<br />8<br />Opportunity Costs<br />
  9. 9. Suppose that you are a ship wrecked sailor on a deserted island. Each day that you go out you can catch either 10 fish or gather 5 coconuts. <br />The opportunity cost of catching 2 fish is one coconut. <br />10/5=2<br />9<br />Opportunity Costs Using Numbers<br />
  10. 10. Suppose that you work for a company that produces Butter and Milk. Each day a factory worker is able to produce 100 gallons of milk or 50 sticks of butter. What is the opportunity cost, if the worker chooses to produce 50 sticks of butter?<br />10<br />Opportunity Costs Using Numbers<br />
  11. 11. Calculation<br />100 Gallons of Milk /50 Sticks of butter<br />=2<br />The opportunity cost to produce 1 stick of butter is 2 gallons of milk.<br />The opportunity cost to produce 2 gallons of milk is 1 stick of butter.<br />What would the opportunity cost be if they wanted to produce 30 sticks of butter?<br />11<br />Opportunity Costs Using Numbers<br />
  12. 12. Examples<br />A person who has $15 can either buy a CD or a shirt. If he buys the shirt the opportunity cost is the CD and if he buys the CD the opportunity cost is the shirt. If there are more choices than two, the opportunity cost is still only one item, never all of them.<br />A person who invests $10,000 in a stock denies himself or herself the interest that could have accrued by leaving the $10,000 in a bank account instead. The opportunity cost of the decision to invest in stock is the value of the interest. <br />12<br />
  13. 13. If a city decides to build a hospital on vacant land it owns.<br /> In building the hospital, the city had the opportunity to build a sports center on that land, or a parking lot, or the ability to sell the land to reduce the city's debt. <br />13<br />Examples<br />
  14. 14. 60 Gallons of milk will be used to make 30 sticks of butter. <br />14<br />Opportunity Costs Using Numbers<br />
  15. 15. The total costs of both the direct costs and opportunity costs.<br />Total Cost = Direct Costs + Opportunity Costs<br />TC= DC+OC<br />15<br />Total Costs<br />