Opportunity Cost

In this lesson, students will be able to

define the following key words and
concepts:
Trade-offs
Opportunity Cost
Guns or Butter
Thinking at the Margin

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Scarcity exists. We have endless desires
but limited resources.
In Economics, we must choose.
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 Trade-off
• A trade-off occurs when we choose one
course of action over another.
• In Economics, we can never have
everything we want or need.
• We must make choices.
• A woman spends ten dollars buying her
lunch at a local restaurant. She cannot
use the same ten dollars to buy a book. A
trade-off has occurred.
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Sometimes a society is more concerned
with economic growth than environmental
quality.
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 It’s All About Scarcity!
• Scarcity exists. Our wants and desires are
limitless but our natural resources are
limited.
• We can always want more than we have.
As such, we are constantly choosing one
course of action over another.
• We cannot spend ten dollars on a movie
ticket and the same ten dollars on a
restaurant meal.
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 Opportunity Cost
• Whenever we make a decision, we receive
one thing but give other things up.
• If I chose to study tonight for the
examination, I cannot go to the party or
the movies or walk the dog.
• The most desirable alternative given up for
the decision is the opportunity cost.
• Think of the opportunity cost as the best
course of action of all those things you
didn’t get.
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Scarcity and opportunity costs affect
individuals, businesses, and governments.
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 Guns or Butter
• Government officials also must choose
where to spend tax dollars.
• When a government spends more money
on the military, it must invariably spend
less money on consumer goods like roads
and schools.
• Economists refer to government trade-offs
as Guns or Butter.
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The Cost of War
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 Thinking at the Margin
• Sometimes a decision involves whether to
add or subtract one additional unit of a
resource.
• After studying many hours, a student
might ask herself: “Should I study one
more hour?”
• This question is a question at the margin.
• Deciding whether to add or subtract one
additional unit occurs at the margin.
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Should we study one more hour?
That is thinking at the margin.
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 Questions for Reflection
• Provide examples of trade-offs.
• Why do trade-offs exist?
• What is the opportunity cost?
• Provide an example of an opportunity
cost?
• What is thinking at the margin?
• Provide an example of thinking at the
margin.
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