Trade-Off Vs. Opportunity Cost
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The reality of scarcity is the conceptual foundation of economics. Like many academic disciplines, economics has its own language, in which the definition and usage of familiar terms — like scarcity — differ from those of everyday speech, and even from one discipline to another.
This lesson develops the definition and implications of living in a world of relative scarcity in which people must choose between alternative sets of benefits. Further, it introduces the Production Possibilities Frontier, a visual model of the costs and benefits of choosing one alternative over another. Students will understand that: Productive resources are limited.
Therefore, people cannot have all the goods and services they want; as a result, they must choose tradeoff and opportunity cost things and give up others. Effective decision making requires comparing the additional costs of alternatives with the additional benefits. Most choices involve doing a little more or a little less of something; few choices are all-or-nothing decisions.
Different methods can be used to allocate goods and tradeoff and opportunity cost. People, acting individually or collectively through government, must choose which methods to use to allocate different kinds of goods tradeoff and opportunity cost services.
Students will be able to use this knowledge to: Evaluate different methods of allocating goods and services by comparing the benefits and costs of each method. Handouts and Supplemental Materials. What could you be doing instead of being here for this session? List your alternatives here. What is tradeoff and opportunity cost Opportunity Cost for a high school student to study one hour for Economics?
What will confuse your students? We will continue the story of Adam and Eve in a later session. Economics builds on ideas! Scarcity is the condition of not being able to have all of the goods and services one wants. It exists because human wants for goods and services exceed the quantity of goods and services that can be produced using all available resources.
Like individual, governments and societies experience scarcity. Tradeoff and opportunity cost involve trading off tradeoff and opportunity cost expected value of one opportunity against the expected value of its best alternative.
The evaluation of choices and opportunity costs is subjective; such evaluations differ across individuals and societies. Marginal benefit is the change in total benefit resulting from an action. Marginal cost is the change in total cost resulting from an action. As long as the marginal benefit of an activity exceeds the marginal cost, people are better off doing more of it; when tradeoff and opportunity cost marginal cost exceeds the marginal benefit, they are better off tradeoff and opportunity cost less of it.
Scarcity requires the use of some distribution method, whether the method is selected explicitly or not. Comparing the benefits and costs of different allocation methods in order to choose the method that is most appropriate for some specific problem can result in more effective allocations and a more effective overall allocation. Define scarcity as the fundamental economic condition, and provide examples of the importance and implications of relative scarcity.
Develop the logic that leads from scarcity to the necessity of choice. Illustrate how the economic condition forces everyone — consumers and tradeoff and opportunity cost — to make choices.
Discuss how societies devise different systems of allocation to systematically address the necessity of choice. Demonstrate the subjectivity of distinctions between needs and wants. Discuss how allocation systems help people make choices. Illustrate the concepts of trade offs and opportunity cost. Introduce and practice the production possibility frontier model of trade-off and opportunity cost.
Introduce marginal decision making. Illustrate and explain how economists distinguish between good choices and poor choices. Ask and answer the question: We live in a world of relative scarcity. Scarcity exists when resources have more than one valuable use. Scarcity exists even in the midst of abundance. Scarcity forces people to choose between alternatives. People choose purposefully from the alternatives they perceive. Scarcity is dealt with more effectively by recognizing that the distinction between needs and wants is subjective.
Societies have adopted a variety of allocation systems to deal with scarcity. The opportunity cost of choosing one alternative is the value given up by tradeoff and opportunity cost taking advantage of the next best alternative. To choose is to refuse: Good decision-making occurs at tradeoff and opportunity cost margin. We seldom make all-or-nothing decisions; everyday life is an exercise tradeoff and opportunity cost marginal decision-making.
Decisions to continue or discontinue an activity are made by weighing the tradeoff and opportunity cost expected benefits against the additional expected costs.
The PPF Production Possibility Frontier models the trade-offs and opportunity costs that necessarily tradeoff and opportunity cost decision-making in the face of scarcity. Scarcity is more of a problem for the poor. People face scarcity; governments do not.
Producers make choices differently than consumers. We can have more without giving tradeoff and opportunity cost anything. Good decision-making means being able to distinguish between good and bad alternatives.
Sometimes, you just have no choice. Once a choice is made people must stick to it. The value of an education is an exclusive personal benefit. Economic choice making principles work better for western societies. How can something be scarce and not in short supply at the same time?
How can it be that rich people face as much scarcity as poor people do? Does finding more productive resources make things less scarce? Why, in economic terms, is the price of a good or service different than its cost?
How can you give up something you never had in the first place? Is the production possibility curve ever a straight line? Classroom Activity Options Distribute and discuss the article entitled Scarcity. Bring in an item to use for the simulation — a large cinnamon roll for a morning class, or a gourmet chocolate bar for an afternoon class — something you know many students will want.
Give them 5 minutes to work in groups of 2 or 3 to brainstorm and list as many ways to distribute the item as possible. Re-convene the large group and, in round-robin fashion, list distribution methods on the overhead or whiteboard, until no new ways are proposed. Do not allow discussion during this time, only the listing of the distribution types. Group the list items into standard categories of allocation systems: Once this exercise is completed, tell students they now have the knowledge they need to make an informed decision and that they will get one vote each to determine how the item will be distributed.
Distribute the item as selected by the class. Then, tell the class that what tradeoff and opportunity cost just did is reflective of economies throughout the world. Assign the students with the task of identifying the cost to them of each of the following choices: For each choice, tradeoff and opportunity cost the next-best alternative. First choice of the morning: Get up when the alarm goes off. Turn tradeoff and opportunity cost the alarm and go back to sleep.
Second choice of the morning: Go back to bed. Emphasize that the value of the next-best alternative is the opportunity cost of each decision. Ask students if they will stay in school until graduation. Ask them what could make them change their minds — either from yes to no, or from no to yes.
Emphasize that deciding whether or not to keep coming to school is a marginal decision. Each day, students weight the expected additional costs and expected additional benefits of going to school again, and if those expected additional costs or benefits change, then their decision about staying in school until graduation may change.
Display the big pencil and discuss all of the choices that must be made and by whom in order to produce it. Identify the productive resource categories and why these are scarce. Introduce the incentives that cause the pencil to be produced. Obtain a two pan balance and use this prop to visually reinforce the decision-making process of weighing expected costs with expected benefits.
Distribute practice PPF problems for students to work on individually or in small groups. Ask students to generate original PPF examples demonstrating trade-offs and opportunity costs from their own lives. Ask students to discuss the question of how an understanding of opportunity cost could change their own lives. The Tampa Tribune, April 7, Most economic concepts are repetitive and used in a variety of application as we build the economic way of thinking Know the key concepts very well!