Opportunity Cost - University of Santo Tomas

 Chapter 2: Opportunity Cost Sunk Cost PPC Engr. Olive U. Dimatulac, MBA  Why is SCARCITY considered a problem? A. People have UNLIMITED wants and needs, but there are a LIMITED amount of resources to meet their demands.  What is the effect of scarcity f...

 Chapter 2: Opportunity Cost Sunk Cost PPC Engr. Olive U. Dimatulac, MBA  Why is SCARCITY considered a problem? A. People have UNLIMITED wants and needs, but there are a LIMITED amount of resources to meet their demands.  What is the effect of scarcity for economics? Due to the scarcity of resources, people have to make a lot of CHOICES. a. Choices made by: I. Consumers: What to buy, trade, or use? II. Businesses: What resources to use and what products to produce? Opportunity Costs Tradeoffs imply costs – when a decision is made, something is forgone The cost of getting something is what you give up to get it Opportunity cost – the value of the next best alternative when a decision is made  Opportunity Scarcity Tradeoffs Cost  What is OPPORTUNITY COST? The missed opportunity or what you gave up for making the choice or purchase. For example: You decide to spend money 0n a four year college degree. Opportunity Costs: Missed: Benefit: Earning money from a job Earned college degree Time with friends Getting job experience and skills Spent $40,000.  Identical twins Ashley and Mary Kate graduate with Bachelor's degrees and receive the same job offer. Ashley passes up the job offer to pursue a Masters degree while Mary Kate takes the job offer and begins working. Two years pass and Ashley graduates and begins working. By this time Mary Kate has been promoted to a position that is comparable to Ashley’s starting position, and Mary Kate’s salary has increased to an amount that is comparable to Ashley’s starting salary.  So, who made the better decision, Ashley or Mary Kate?  In the example, one could argue that Ashley made the better decision since  In business and in life, every a Masters degree would be valuable if choice we make comes at a both lost their jobs and found cost since we forgo other themselves in a competitive job possible alternatives in the market. Yet when you look at the process; this cost — whether situation in terms of opportunity costs, it’s money, time, education, Ashley’s Masters degree came at a cost health, et cetera — is known of two years salary. If Ashley and Mary as an opportunity cost. Kate stay on equal career paths from here on out, Mary Kate ends up making the better decision.  LeBron James is a Master Opportunity Cost Attending any $13 million college in the contract with country on Cleveland scholarship to Cavaliers/spons play basketball. orship with Nike and Coke VS. Making Economic Decisions  How is opportunity cost estimated? Opportunity cost is subjectively estimated by the individual decision maker Example: Assume you are about to graduate and you will be faced with the decision to attend oursue master’s degree or enter the workforce. You could either a) spend the P100,000 a year to pursue another degree, or b) take a job working retail in SM for P100,000/ year What will you choose?  What is your opportunity cost of attending college? If make P3000 a week, but you expect you could make P5000 without school - your opportunity cost is P2000  What is the opportunity cost of cleaning your room? It’s greater on sunny days than on rainy days  What is a sunk cost? A cost that is irrelevant when an economic choice is being made  What is an example of a sunk cost? The P600 you pay to watch a boring movie is irrelevant to whether or not you watch it to the end. You can no longer recover it  What is absolute advantage? The ability to produce something with fewer resources than other producers use You can paint a room in 2 hrs, a high school student in 3 hrs, who has absolute advantage? You do because you can do it faster  What is comparative advantage? The ability to produce something at a lower opportunity cost than other producers face  You can make P500 an hr, the high school student makes minimum wage of P500 per day, who should paint? The high school student because of a lower opportunity cost What is the Production Possibilities Curve? A production possibilities graph (PPG) is a model that shows alternative ways that an economy can use its scarce resources This model graphically demonstrates scarcity, trade-offs, opportunity costs, and efficiency. 4 Key Assumptions Only two goods can be produced Full employment of resources Fixed Resources (Ceteris Paribus) Fixed Technology  a b c d e f Pizzas 14 12 9 5 0 0 Giant Robots 0 2 4 6 8 10 Each point represents a specific combination of goods that can be produced given full employment of resources. NOW GRAPH IT: Put Pizzas on y-axis and Giant Robots on x-axis  Production Possibilities How does the PPG graphically demonstrates scarcity, trade-offs, opportunity costs, and efficiency? A Impossible/Unattainable 14 B (given current resources) 12 G 10 C Pizzas 8 Efficient 6 D 4 Inefficient/ Unemployment 2 E 0 0 2 4 6 8 10 Giant Robots 24  Opportunity Cost Example: 1. The opportunity cost of moving from a to b is… 2 Bikes 2.The opportunity cost of 7 Bikes moving from b to d is… 3.The opportunity cost of 4 Computer moving from d to b is… 4.The opportunity cost of 0 Computers moving from f to c is… 5.What can you say about point G? Unattainable  Production Possibilities a b c d e CALZONES 4 3 2 1 0 PIZZA 0 1 2 3 4 List the Opportunity Cost of moving from a-b, b-c, c-d, and d-e.  Production Possibilities A B C D E PIZZA 20 19 16 10 0 ROBOTS 0 1 2 3 4 List the Opportunity Cost of moving from a-b, b-c, c-d, and d-e. Law of Increasing Opportunity Cost As you produce more of any good, the opportunity cost (forgone production of another good) will increase. Why? Resources are NOT easily adaptable to producing both goods. Questions?