Trade-offs_ Opportunity Cost_ an by pengxiuhui


									Trade-offs, Opportunity Cost, and
      Resource Allocation
              Page 6
• An alternative we sacrifice when we make a decision
     – All the things we could have done instead are the trade-offs
• Since we can’t have it all, we have to give some
  stuff up in order to have other things
• To decide what we are willing to give up (the trade-
  offs), we have to think about the cost vs. the benefit
  of each option
   – We “trade-off,” or give up, the options we perceive as
     too costly relative to the benefit
             Opportunity Cost
• The next best alternative forgone (given up)
  when someone makes a choice
  – What you would have done instead; your 2nd
• Because of scarcity, we have to make choices.
  The true cost, or opportunity cost, of our
  choices is the next best option we didn’t
  choose to take
  – Opportunity cost vs. trade-off: trade-offs are all of
    the options not selected, opportunity cost is the
    best option among the trade-offs
 Did you choose for good reasons?
• If you considered the benefit vs. the cost of
  each option ….
• If you then selected the best option based on
  a benefit vs. cost analysis ….
• Then you have chosen wisely!
           Resource Allocation
• So – we have to make choices to deal with
  scarcity, and those choices have consequences
  (opportunity cost, secondary effects)
• As a society, we have to allocate (divide up,
  distribute) our scarce resources
• How we allocate resources depends on many
  factors and will therefore differ depending on the
• No matter the strategy for allocating resources,
  each strategy is chosen based on considering the
  trade-offs and accepting that opportunity cost is
  less then the anticipated benefits

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