Benefit/Cost Analysis “Things don’t have costs; choices do.”

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Benefit/Cost Analysis “Things don’t have costs; choices do.”

Transcript of Benefit/Cost Analysis “Things don’t have costs; choices do.”

Benefit/Cost Analysis

“Things don’t have costs;

choices do.”

Benefit/Cost analysis involves the search for all alternatives.

The Five Steps of Benefit/Cost Analysis

1. Identify the resources and state the goal

2. List alternative uses of the resources to achieve the goal

3. Identify the advantages and disadvantages of each alternative

4. Identify the choice and the opportunity cost of the choice

5. Review the decision, was your choice right for you?

Vocabulary

• Decision making – the process of identifying a choice

• Goal – something that a person wants to have or do

THE APRON

Bella’s DecisionLive happily with Edward or Jacob

Edward

Advantages

• Great car• Long life (death)• Good family• Handsome• Rich• Lots of education• Get to travel

Disadvantages

• Danger to Bella• Nerdy• Abandons Bella• Glows in sunlight• Cold• No tan• Have to abandon father

Jacob

Advantages

• Will protect Bella• Bella’s father approves• Hunk• Warm• Nice tan• Into motorcycles• Get to stay home

Disadvantages

• Like a little brother• Potential danger• Abandons Bella• Moody• Bella has to take care of

him• Smells bad when he’s

wet

Benefit/Cost – another example

1. Sonja’s goal is to use her human capital to have the best time possible at the senior prom. With whom should she go?

2. Alternatives – Harry Potter or Spiderman3. Advantages and disadvantages of each. 4. She chooses Spidey, the opportunity cost is

Harry.

Harry Potter

Advantages Disadvantages

Spider ManAdvantages Disadvantages

Keep in mind

• The choice is the alternative selected. • The opportunity cost is the alternative not

selected, the opportunity given up.• Every choice has a cost; there is no such

choice as a free choice. • Disadvantages are not costs. • With every decision, there is only one choice

and one cost.

Your Decisions

• List four decisions that you have made in the last

month and the opportunity cost of the choice. e.g. To achieve the goal of ________, I used my _________ to _______ instead of _________.

– To achieve my goal of maximizing my wealth on Sunday , I used 3 hours of my human capital to watch football instead of studying for my econ class.

Your students’ decisions

• List three decisions that your high school might make, placing them in the same format as the examples above.

Historical Decisions

• List three decisions that historical characters made and put them in the same format as the two above.

•  e.g. To achieve the goal of winning the war, George Washington used his troops to withdraw from New York rather than stay to fight the British.

Historical Decisions• Colonist in 1776 – rebel or tory?• Caesar in 30 BC – enter Rome with or

without army• Truman 1945 – bomb or troops?• Kennedy 1960 – Cuba bomb or blockade• 49er gold seeker – land or sea? • Robert E. Lee – Union or Condederacy

Historical markets

• Why did Marc Antony want Egypt?• Why did the English want to come into the

U.S. Civil war on the side of the South?• Why did Columbus sail the ocean blue in

1492?• Why did the people of New England want to

revolt against the English?

Alternative uses of your money

(embedded human capital)

• Eat at home or eat out?

• What video?

• Brand name or generic shoes?

• What music

The importance of alternatives

• Power – an impressive list of alternatives in terms of quantity and quality

• Poverty – few good alternatives

• Your job in school – build your human capital so that you will have power