Economics Unit 1 Lesson 2 Part 3

OPPORTUNITY COSTS

Let's explore another option, or alternative, for the $100 that you spent on your new outfit. What if a new cell phone also costs $100? Then, you could have spent your $100 buying the cell phone. But you didn't, because you chose the new outfit. In other words, you gave up the cell phone to buy the outfit. In economics, the benefit, or satisfaction, that you gave up by not choosing the next best alternative is known as the opportunity cost. In the case of the school dance, the opportunity cost of buying the new outfit is any value that you could have gained by owning the cell phone instead. This value might include talking and texting your friends more, surfing the Web more easily, and even enjoying the fun of choosing ringtones. All of these possible sources of convenience and enjoyment are things that you gave up when you chose to spend your $100 on an outfit instead of a cell phone.

accounting cost

cost of producing a good or service

ROLE OF UTILITY AND TRADE-OFFS

Smiles, Anyone? Opportunity costs include any happiness you could have gained from choosing the best alternative. Some economists study utility, which is another word for happiness. Each decision you make has utility that you gain, such as the happiness derived from wearing your new outfit. It also has utility that you gave up, such as the utility that you lost from not choosing the cell phone. This lost utility is part of the opportunity cost of choosing the outfit. It is one of the benefits that you lost from not choosing the cell phone. But are there really only two choices for how to spend $100? Of course not. There are many ways to spend $100. These other options are called alternatives, and the value of all the alternatives given up is called the trade-off. In the case of the $100, your trade-offs might include: buying a cell phone; putting the money in the bank and saving it for later use; buying some concert tickets; donating the money to charity; saving part of your money and spending the rest on new clothes; or paying for a summer membership at the gym. The items listed above are alternative ways to use your $100. Suppose you prioritized your list, that is, listed the alternatives in order of their importance. The first item on your list was your best alternative (the cell phone). The benefits given up by not choosing this alternative make up your opportunity cost. But, the benefits given up by not choosing all your alternatives (including the cell phone) are your trade-offs.

Which of the following can reduce the amount you pay for a good or service?

coupons mail in rebate comparative shopping

Select a situation that describes the utility derived from purchasing a cell phone

happiness from using your new cell phone

utility

happiness; satisfaction

retail price

money value of a good or service that is charged to the customer

alternative

option

monetary

relating to money

Shari is trying to decide how she should use her cash birthday gifts. Her choices are new clothes, a concert ticket, or donating the money to her favorite charity. Shari decides to donate the money. The value given up by not choosing both the clothes and the concert ticket is called a

trade-off

trade-off

value of all the alternatives given up

An opportunity cost is the

value of the best alternative given up

opportunity cost

value of the best alternative given up

RETAIL PRICE AND ACCOUNTING COST

When you think of the cost of a good or service, you probably think of its retail price. This price is the monetary, or money, value of a good or service that is charged to the customer. For example, if a pair of jeans costs $50, then its retail price is $50; and if your new outfit for the school dance costs $100, then $100 is the outfit's retail price. Sometimes you have to do a little math before figuring out the total retail price. For example, suppose you are filling up a car with gas and that gas costs $2.50 a gallon. If your car needs 10 gallons of gas, then the total retail price will be $25.00 (or $2.50 times 10). In the real world, you may pay more than a product's retail price, because of something called a sales tax. This tax refers to the amount that state governments charge consumers to buy many goods and services. The amount of the tax is calculated as a percentage of an item's retail price and then added to the price tag amount. This percentage differs depending on the state, and not all items are subject to sales tax. The retail price that a company charges you for a good or service depends on the accounting cost. This cost is the amount that a company pays to produce a good or service and get it to the customer. A company has to earn enough money to pay for the expenses of making a product. But companies also want to earn more money than just enough to pay their bills. This extra money is called profit. So, companies charge retail prices that are higher than their accounting costs.

A music download costs $1.00 for one song. $1.00 is an example of

retail price