Opportunity cost refers to the cost of the next best alternative forgone when choosing one option over another. It can include money, time, or resources given up now or in the future. Every choice has an opportunity cost equal to the highest valued alternative not chosen. For example, the opportunity cost of spending $20 at the movies includes the forgone options of buying candy, food, or saving the money. Opportunity costs should be considered when making economic decisions to maximize benefits.

1. Opportunity Cost
Decision making

2. Opportunity Cost
To an economist, cost is the cost
of what you give up when one
choice is made over another.
This is known as “opportunity
cost.”
This could mean money, time, or
resources either now or in the
future.

3. Opportunity Cost
The highest-valued, next-best
alternative that must be sacrificed to
obtain something or to satisfy a want

4. Opportunity Cost Example
For example, if you are given $20 and
you choose to go to the movies and
spend that $20. Your Opportunity Cost
would be everything else that you
could’ve done with that $20… like
a) Buy candy
b) Buy McDonalds
c) Save the money

5. Opportunity Cost
Questions
What is the opportunity cost of
attending this economics class?
What is the opportunity cost of
attending a concert by your favorite
band?
What is the opportunity cost of
increasing research for an AIDS
vaccine?

6. Opportunity Cost Video
 https://www.youtube.com/watch?v=whZORVxPaLE
 First minute-ish

7. Opportunity Cost
Create your own example of
opportunity cost.

8. Incentives
Incentives are methods used to
encourage people to take certain
actions.
They can also be benefits offered
to encourage people to act in
certain ways.
Grades in school, Wages,
Praise/Recognition, etc.

9. Examples of Incentives
Grades in school
Wages paid to workers
Praise and recognition

10. Cost-benefit analysis- is an
approach that weighs the
benefits of an action against
its costs.
Economize- To make
decisions according to the
best combination of costs and
benefits.

11. Trade-Off
Is the alternative option
people give up when they
make choices.
Usually trade-offs do not
require all-or-nothing choices.

12. Trade-off/Opportunity Cost
Example
Timmy is failing Economics. He
has an Economics test next
Monday.
He hasn’t gone to tutorials after
school because he’s been
hanging out with his girl, Cindy,
instead.

13. Trade-off/Opportunity Cost
Example
Timmy has 6 hours of “free
time” after school every day
this week.

14. Timmy and his decisions…
Timmy has to make decisions
according to the best
combination of costs and
benefits. In other words,
Timmy has to _________.

15. Timmy’s Cost-benefit Analysis
If Timmy chooses to study
instead of hang out with Cindy,
he’ll pass the test.
If Timmy doesn’t hang out with
Cindy, she’ll talk to someone else
instead.

16. Timmy’s Cost-benefit Analysis
continued…
If Timmy chooses not to study,
he’ll fail the test.
If Timmy chooses to hang out
with Cindy, she’ll stay with
him.

17. Incentives?
What is Timmy’s incentive
for studying?
What is Timmy’s incentive
for hanging out with Cindy?

18. Opportunity Cost?
If Timmy chooses to hang
out with Cindy, what would
be the opportunity cost?

19. Trade-off example
What would be an
example of a trade-
off?

20. Decision Making Grid
Pg15.
What is Max’s opportunity cost of 3 extra
hours of study?
Read the information about marginal costs
on pg16. What would be Max’s marginal
cost of moving from a grade of B+ to A-?

22. After high school decision making
grid
Copy down the decision making grid
in your notes.
Public schools vs. Private schools?
$ and Class size

23. Make your own…
Make your own decision making
grid based on classes you want to
take in college…

24. Underutilization- Means
producing fewer goods and
services than possible.
Efficiency- Involves producing
the maximum amount of
goods and services possible.

25. How to represent opportunity
cost?
• The production
possibilities curve
(PPC) represents all
possible maximum
combinations of total
output that could
be produced.

26. PPC - Studying

27. Production Possibilities Table
Pg. 19
If you decided to make 35 muffins, how
many loaves of bread could you make?
What is the opportunity cost of making the
7 loaves of bread?

30. Guns vs. Butter
• “Guns vs. Butter” was a major issue during the
presidency of Lyndon B. Johnson in the 1960s.
“Great Society” program called for a “war on
poverty.” This required the government funding of
many social reforms.
• An expanding war in Vietnam saw these government
funds being switched from domestic programs,
“butter”, to defense spending, “guns”.
• The opportunity cost of increasing defense
production was that the social programs could not be
funded.

31. PPC: Guns vs. Butter
Copy figure 1.5 in your notes.
What do the “guns” represent?
What does the “butter” represent?