Understanding Opportunity Cost and Efficiency in Production Economics

1. Opportunity Cost

2. Fill in the Blanks • We have _________ wants and needs. • We have _______ resources. • Therefore, we must make ______

3. Review Questions • 4 Factors of Production: • 1.______ 2._____ 3.______ 4.________ • Resources are allocated by answering these 3 questions: • 1._______ 2._______ 3.______

4. Scarcity and Choice • Productivity—The level of output that results from a given level of input. • Sleepy Time Clock Company: • Employs 100 people—Produces 1000 clocks/day • Each worker produces entire clock • Need to improve productivity—Manager goal • Efficiency

5. 100 employees 1000 clocks/week Avg. 10 clocks/worker Each worker produces the whole clock. Problem: Must close factory; not enough production/person What to do? Efficiency Division of labor Specialization Mechanization Sleepy Time Clock Company

6. Efficiency Example • 100 Workers produces 1000 clocks • 1000/100=10 clocks/worker/day • 80 Workers produces 1000 clocks • 1000/80=12.5 clocks/worker/day • 110 Workers produces 1000 clocks • 1000/110=9.1 clocks/worker/day • What happens to the $ cost per clock as the clocks per worker >? <?

7. Efficiency • Given:100 People;Earn $10/hour;Work8 per day • Each worker paid $80 per day. (Factory produces 1000 clocks per day). • 100X$80=$8,000 labor cost • $8000/1000=$8.00 cost per clock • 80X$80=$6,400 labor cost • $6400/1000=$6.40 cost per clock • 110X$80=$8,800 labor cost • $8800/1000=$8.80 cost per clock

8. Efficiency • Efficiency-is the use of the smallest amount of resources to produce the greatest amount of output. • Division of Labor—Assigning a small number of tasks to each worker. • Specialization—The focus of one activity. • Advantage: More efficiency and output • Find shortcuts-more clocks with same amount of people. • Mechanization: More machines/less workers. • Technology—is the use of technical knowledge and methods to create new products or make existing products more efficiently.

10. Trade offs and Opportunity Cost • Trade-Offs • ALL the alternatives that are given up when one choice is made over another • all individuals, businesses, large groups, government make trade-offs • Guns or butter • Opportunity Cost—The value of the next best alternative given up to obtain and item • Most choices have many alternatives • They all are trade offs but only the 2nd best choice is the opportunity cost. • Every choice has a cost. • TANSTAAFL – There Ain’t No Such Thin As A Free Lunch

12. Opportunity Costs Example • You have $25 and it’s Saturday night: • Go to the Suns game • Go to the movies • Order pizza and hang out with friends • Go to a concert at the Dodge Theatre • Study Economics

13. Examples • Circle K • Late start • After High School

14. Opportunity Costs Example • Sleep late or wake up early for a ski trip? • Sleep late or wake up early to eat breakfast? • Sleep late or wake up early to study for a test?

17. Cost / Benefit Analysis • Thinking at the Margin – how much more or less to do • decision making process • compare opportunity cost & the benefits • what will be sacrificed, what will be gained • once the opportunity cost outweighs the benefits, no more units should be added

18. Trade Offs / Opportunity CostsAssignment • List 5 things you would like to do with $100. • Those 5 are your _______________________. • Pick your top item you would purchase. • What would be your second choice? • Your 2nd choice is your ____________________. • What did you have to give up to spend $100? • What does the term “guns or butter” mean?