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Instructions:  View instructions on the section padlet.

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Instructions:  View instructions on the section padlet.

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Team:  Students will do one chapter per section.  View your assigned padlet at this link.

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Team:  Students will do one chapter per section.  View your assigned padlet at this link.

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Opportunity Costs (the "Price" of Missed Opportunities) Explained in One Minute

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"Marginal" Explained in 90 Seconds - Economics

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1st- Choices are the foundation of all economic force
2nd- The Cost-Benefit principle:  We consider the costs and benefits of a choice.
3rd- The Opportunity Cost principle: Before making a choice, we consider the alternatives, asking ourselves what we could be getting instead
4th- The Marginal principle: We think at the margin, always asking whether a bit more or a bit less of something would be an improvement.
5th- The Interdependence principle: We are particularly attuned to understanding how different decisions depend on each other.

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This chapter is an introductory chapter on the 4 economic principles it is focused on. It introduces the 4 principles briefly and tells us how these principles are our key to understanding the economic world.

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This website has a few examples of opportunity costs in the real world and dives deeper into why understanding opportunity costs are important.

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What do economists think about strawberry smoothies? That depends on how good the kiwi flavor is instead-plus a range of other choices. Which stirs up the idea of opportunity cost.

How is opportunity cost defined in everyday life?

"Opportunity cost is the value of the next-best alternative when a decision is made; it's what is given up," explains Andrea Caceres-Santamaria, senior economic education specialist at the St. Louis Fed, in a recent Page One Economics: Money and Missed Opportunities.

The Scoop on Scarcity

We can't have everything we want in life. This is where scarcity factors in. Our unlimited wants are confronted by a limited supply of goods, services, time, money and opportunities. This concept is what drives choices-and, by extension, costs and trade-offs, Caceres-Santamaria says.

She uses the example of deciding to buy a $7 smoothie at the mall. She notes that many people would view the choice as a single one based on whether you want the drink.

Instead, she suggests wearing "a unique pair of 'economist glasses'" to see the decision differently, asking:

1. How much do I value this?

2. What am I giving up now to have this?

3. What am I giving up in the future to have this now?

Costs That Are Seen and Unseen

Our inclination is to focus on immediate financial trade-offs, but trade-offs can involve other areas of personal or professional well-being as well-in the short and long run.

That's why Caceres-Santamaria challenges us to consider not only explicit alternatives-the choices and costs present at the time of decision-making-but also implicit alternatives, which are "unseen" opportunity costs.

"It's about thinking beyond the present and assessing alternative uses for the money-that is, not being shortsighted," she writes.

What are some other examples of opportunity cost?

A student spends three hours and $20 at the movies the night before an exam. The opportunity cost is time spent studying and that money to spend on something else.

A farmer chooses to plant wheat; the opportunity cost is planting a different crop, or an alternate use of the resources (land and farm equipment).

A commuter takes the train to work instead of driving. It takes 70 minutes on the train, while driving takes 40 minutes. The opportunity cost is an hour spent elsewhere each day.

Is Opportunity Cost a Big Deal?

We might not consider lost studying time or $7 spent on a smoothie costly decisions, but what about bigger choices-like the decision to stretch and buy a more expensive home versus a starter home, or to spend $1,500 more on an upgraded trim package for your next car?

Caceres-Santamaria describes how opportunity costs are neglected even more when making higher priced purchases. Using the car-buying example, a consumer might default to thinking of the relative value of the $1,500 upgrade to the base price of the car, say, $18,500.

Rather than comparing the fancier configuration to the vehicle itself, it might be more helpful to ask what else that $1,500 could buy outright.

Why the Rush?

"Most of our decisionmaking that involves money is based on immediate or sooner-than-later consumption," Caceres-Santamaria notes. "The excitement of consuming today is valued significantly more than the thought of consuming in the future."

It's human nature: We grow impatient, tugged by the immediacy of a promised benefit versus a payoff that's possibly years down the road.

If seeing is believing, it's worth looking at the future value of money -a concept many of us have read about in retirement plan literature or heard from financial advisors.

The Future Value of Money

Example 1: The one-time windfall

Let's say you got a surprise $4,000 windfall and want to use it for a getaway trip. Why not? It's found money, so there's no loss to you-unless you think about the opportunity cost.

If you nixed the trip and plunked your money into an income-producing product that earned an average annual interest rate of 3%, compounded monthly, you could find yourself with a cool $5,397 in 10 years.

Wait another five years, and your funds could grow to $6,270. (Neither example factors in the effects of inflation and taxes owed.)

That's the added benefit in money terms. You'll also want to consider the experiences that an extra $1,400 or more-the future earnings on your $4,000-could make possible.

Example 2: Small, regular savings over time

That's an example of investing a single lump sum over time. What about the opportunity cost associated with daily purchases, such as the $4.49 caffè mocha you pick up three times a week? How much money could you find yourself with if investing that $54 each month rather than spending it?

If you dropped the coffee (careful!), invested $54 per month and earned the same 3%, compounded monthly, you'd have $7,619 to dunk your doughnut into in 10 years.

Too long to forego that regular mocha? Cutting the time frame in half to five years would still give you $3,554 in savings. (Again, these sums don't include the impact of inflation and taxes.)

These examples are striking, especially when considering that a $4.49 caffè mocha habit over time can dwarf the seemingly larger decision to splurge on a $4,000 getaway trip.

Want to test some of your own opportunity cost what-ifs? Caceres-Santamaria encourages consumers to avoid "autopilot" mode when it comes to financial decisions. Start small-even with a pack of gum-and brainstorm as many alternative uses for your money as you can.

Additional Resources

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Real-Life Examples of Opportunity Cost | St. Louis Fed

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What do economists think about strawberry smoothies? That depends on how good the kiwi flavor is instead-plus a range of other choices. Which stirs up the idea of opportunity cost. How is opportunity cost defined in everyday life?

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Ask yourself these four questions to determine which principle is being used.       1."One more?" - Marginal               2."Benefit beat cost?" -Cost-Benefit Principle                          3."Or what? - Opportunity Cost    4."What else?" - Interdependence

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Chapter 1 Section 2 Cost-Benefit Principle

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Chapter 1 Section 2 Cost-Benefit Principle

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This chapter explains the idea of the cost-benefit principle, where a buyer evaluates every purchase in life by how the item will benefit and cost them as compared to different options. If the costs outweigh the benefits, then this option is not smart for the buyer to purchase, and something else should be considered that has more benefits instead.

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1: The cost-benefit principle is used to evaluate all options before purchasing something, and decide the option with the most benefits over cost.
2: The cost-benefit can be applied in willingness to pay, where you evaluate how much a product means to you and apply a price on what you would pay for it.
3: Money is just a measuring tool for choices, nonfinancial aspects are just as important to consider when using the cost-benefit principle.
4: When the benefits outweigh the cost, it is called economic surplus. The more choices you make, the larger economic surplus you will gain.
5: Focus on the cost-benefits only, sellers can make benefits seem larger by using higher priced products and sales to change your view on costs. This is called framing and changes how you evaluate a purchase.

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Chapter 1 Section 3 Opportunity Cost Principle

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Chapter 1 Section 3 Opportunity Cost Principle

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This section talks about the opportunity cost principle, which is analyzing the true costs of a decision, not just financially. Scarcity causes us to have limits in life, which then makes us raise "either/or" questions to decide what path is best. Thus, using opportunity cost makes you realize the tradeoffs that arise when making any decision.

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1: Opportunity cost is used to evaluate the true cost of a decision, not just a financial number. These are called "Trade-offs"
2: Scarcity is part of our lives, (time, money, etc.) which causes us to make decisions based on how we wish to use or limited resources. In doing so, it limits what else we can use these resources on.
3: Asking "or what" questions allows you to understand the trade-offs in a decision. This allows you to think of the best alternative you could use the resources on, and then evaluate your decision from there.
4: Sunk costs are resources you used in the past, and should be ignored when making an opportunity cost decision. No matter how much has been invested already, sunk costs don't matter because they have already been used, and can't be used in the future. (e.g.: Staying in a job you hate because you have worked there awhile)
5: Production possibility frontier is a graph used to evaluate the opportunity costs by placing two choices on the axes and using the graph to visualize how one option will effect the other.

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This is Figure 4 from Chapter 1 Section 3, and best illustrates how to use the production possibility frontier. 

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Figure 2 from Chapter 1 Section 2 and illustrates how cost-benefits would be used in the decision of buying a car or using Uber instead.

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Figure 5 from Chapter 1 Section 4 This shows an easy way to understand the marginal principle.

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Production Possibility Frontier (PPF) explained

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Chapter 1 Section 4 The Marginal Principle

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Chapter 1 Section 4 The Marginal Principle

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This section covers the marginal Principle which is about the marginal benefit of adding one extra employee or buying one extra product. This is often paired with cost-benefit analysis as you are able to compare the marginal benefits versus the marginal costs. The main point is "should you buy one more"
The rational Rule dictates if something is worth doing keep doing it until your marginal benefits equal your marginal costs