Standard

• SSEF1• a. Define scarcity as a basic condition. • d. Define opportunity cost as the next best

alternative

ReviewWhat is the fundamental economic

problem?

Review: ScarcityWhat is Scarcity?

What makes something Scarce?

Must be desirable

Must be limited

Must have value

(price)

In order for an item to be desirable it must have Utility (be useful).

Which one is really worth more?

Water

Or

Diamonds

Paradox of value• Paradox of Value:

A situation where a necessity is worth less than a non-necessity

• Value: refers to worth in dollars and cents OR what something is worth to you

Think about it….• Did you have to give up

something to come to school today?

Opportunity Cost

The NEXT BEST THING you could use your resource for.

Opportunity Cost• The opportunity cost

of a choice is the value of what you must give up when you make a particular choice.

• The choices people make have both present and future consequences.

Trade-Off• Giving up some of

one thing to get more of another

• Trade-offs are all those things you could have done with your time and/or money but didn’t choose to do.

Try it:Opportunity cost vs. Trade off• Step 1- Think of 5 school appropriate

things you would do with a couple of hours of free time this weekend . Write them down.

• Step 2 – List them from #1 being your first choice to #5 being your last

T-chart

1.

2.

3.

4.

5.

Things I would do with my free time.

Economic Term

Opportunity Cost Trade-offs

Marginal Analysis• In economics the term

marginal = additional • “Thinking on the

margin”, or MARGINAL ANALYSIS = making decisions based on the additional benefit vs. the additional cost.

Marginal Cost v. Marginal Benefit

• People make decisions based on costs and benefits

• The benefits must equal or outweigh the costs.

• Rational Decision Making takes place when marginal benefits equal or exceed marginal cost.

RDM = ≥

Given the following assumptions, make a rational choice in your own self-interest (hold everything else constant)…

1. You want to visit your friend for the weekend

2. You work every weekday earning $100 per day

3. You have three flights to choose from:Thursday Night Flight = $300

Friday Early Morning Flight = $345Friday Night Flight = $380

Which flight should you choose? Why?15

Cost – Benefit Analysis• Step 1 – Decide what your choices, or

alternatives, are.• Step 2 – List all marginal costs (“cons”)

and marginal benefits (“pros”) in a decision making grid.

• Step 3 – Decide which choice (alternative) benefits you most.

Cost – Benefit Analysis

Choices Cost The “cons” or

negative consequences if you

choose this.

Benefits The “pros” or

positive outcomes of your decision

• List 3 choices of things to do after graduation.

• Use the following chart to complete a cost-benefit analysis to decide where you should go.

Standard• SSEF1• a. Define scarcity as a basic condition. • d. Define opportunity cost as the next best

alternative• List 5 facts that will help you remember this lesson:• • • • •