The Opportunity Cost of a Lifetime
This lesson printed from:
Posted November 27, 1999
Author: Conor Irons
Posted: November 27, 1999
All economic questions and problems arise from scarcity. Economics assumes people do not have the resources do satisfy all of their wants. Therefore, we must make choices about how to allocate those resources. We make decisions about how to spend our money and use our time. This EconomicsMinute will focus on the central idea of economics- every choice involves a cost.
- Define opportunity cost.
- Determine the opportunity cost and trade-offs for certain decisions.
- Select criteria important for decision making.
1. How many sodas can you buy instead of one movie ticket?
[You can buy five sodas instead of one movie ticket. Students should divide the price of a movie ticket by the price of a soda]
2. How many pieces of gum can you buy instead of one soda?
[You can buy two pieces of gum instead of one soda. Students should divide the price of gum by the price of a soda.]
3. If you buy four pieces of gum, how many sodas could you have bought?
[If you buy four pieces of gum, you could have bought two sodas. Students should multiply the price of gum by four which equals two, then divide two by the price of a soda which equals two.]
In order to buy a movie, you need to give up a certain amount of gum and soda. If you buy ten pieces of gum, you give up going to the movie or buying soda. Decisions involve trade offs. When you make a choice, you give up an opportunity to do something else. The highest-valued alternative you give up is the opportunity cost of your decision. Opportunity cost is the highest-valued forgone activity. It is not all the possible things you have given up.
For example, if you go to the movies you have to give up a certain amount of gum and soda. If you are a sodaholic, you have to give up five sodas. If you are gum fanatic, you surrender ten packs of gum. But, the opportunity cost of a movie is not five sodas and ten packs of gum. It is five sodas or ten packs of gum.
Go to the Pokemon Guide and answer the following questions.
1. What is the opportunity cost of an unlimited edition Mewtwo in terms of other Pokemon cards? [The answers will vary. Any combination of Pokemon cards that equals the price of the unlimited edition Mewtwo works as an answer.]
2. Go back to the gum, soda, movie ticket example. What is the opportunity cost of an unlimited edition Mewtwo in terms of movie tickets? [You would have to give up two movie tickets for one unlimited edition Mewtwo.]
All kinds of decisions involve opportunity costs, not just ones about how to spend your money. For example, if you have soccer practice when your favorite television show is on, part of the opportunity cost of soccer practice is missing that television show. When you made the choice to join a soccer team, you had to tradeoff missing that television show for becoming a better player
Go to this Calvin and Hobbes website .
1. In the first panel, what does Calvin want to do with the ball? [Calvin wants to play football with the ball.]
2. Using the ideas of trade-offs and opportunity cost, explain why Calvin gives Hobbes the ball. [Calvin sees a trade-off between losing the game and having an ambulatory adulthood. The opportunity cost of not being able to walk is greater than losing the game. Calvin surrenders the ball to Hobbes.]
All economic questions and problems arise from scarcity. Economics assumes people do not have the resources do satisfy all of their wants. Therefore, we must make choices about how to allocate those resources. We make decisions about how to spend our money and use our time. This <> EconomicsMinute will focus on the central idea of economics- every choice involves a cost.
Let's say you have five dollars. What would you like to spend it on? There are a million things you would love to spend five bucks on, but let's imagine there are only three things out there you really want to buy: gum, soda, and movie tickets. Look at the price chart below and answer the questions.
- What would you spend your five dollars on?
- What would you be willing to give up?
You won a radio station contest and you are now $300 dollars richer. You can finally start looking for a new stereo. Determine what criteria you think are important for choosing a stereo and identify the trade-offs made when selecting one stereo over another.