Narrator: Welcome to this course on economics for life. This presentation is titled the Introduction to Economic Reasoning and Opportunity Cost.

Transcription

1 ECO110HA: Module 1 AVP Transcript Title: Introduction to Economic Reasoning and Opportunity Cost Title Slide Narrator: Welcome to this course on economics for life. This presentation is titled the Introduction to Economic Reasoning and Opportunity Cost. Slide 2 Title: Rational Assumption Predict individual behaviors and choices Image: Family of 3 in front of a house with a sold sticker on top of a real estate sign. Narrator: Economics can be used to predict individual behaviors and choices. Slide 3 Title: Rational Assumption Predict individual behaviors and choices Rational assumption People do not intentionally make decisions that would make them worse off Image: Family of 3 in front of a house with a sold sticker on top of a real estate sign. Narrator: Economists believe in rational assumption, which is the notion that people do not intentionally make decisions that would make them worse off. Slide 4 Title: Incentives Rewards for engaging in a particular activity Can be financial or anything that motivates an individual to behave in a certain way Useful in the business world Useful with interpersonal relationships Image: Bag of money and two plane tickets. Narrator: If the rational assumption holds, this means that individuals will respond to incentives. Incentives are rewards obtained for engaging in a particular activity. They can be financial, or anything that motivates an individual to behave in a certain way. Incentives can be very useful in the business world, and anytime there are interpersonal relationships!

2 Slide 5 Marginal benefits (MB) Last two bullets in grey font color. Narrator: Being rational also implies that individuals make decisions using marginal analysis. This is the process of comparing marginal benefits to marginal costs. Slide 6 Marginal benefits (MB) Additional benefits derived from engaging in one more unit of an activity Last bullet in grey font color. Narrator: Marginal benefits are the additional benefits derived from engaging in one more unit of an activity. Slide 7 Marginal benefits (MB) Additional benefits derived from engaging in one more unit of an activity Additional costs derived from engaging in one more unit of an activity Narrator: Likewise, marginal costs are the additional costs derived from engaging in one more unit of an activity. Slide 8

3 Marginal benefits (MB) Additional benefits derived from engaging in one more unit of an activity Additional costs derived from engaging in one more unit of an activity Image: Girl at desk with thought bubbles; one bubble has music notes in it and the other has a scale with dollar signs. Narrator: Marginal costs do NOT include sunk costs, also known as historical costs. These are costs that have already been incurred due to previously made choices. For example, if you took three semesters towards a major in music, and later decide it s not what you want to do, should you still complete the major? Not necessarily. You should weigh the marginal benefits and marginal costs of continuing the music major only, not what you have already put into it. These are costs that cannot be recovered and are therefore, irrelevant in our analysis. Slide 9 When making choices: If the MB are greater than or equal to the MC, do it! The more you do something, the MB declines Continue doing it until MB = MC If the MB are less than the MC, don t do it Economists call this being rational Narrator: When making choices then: if the marginal benefits are greater than or equal to the marginal costs, do it! However, the more you do something, the marginal benefits decline. Therefore, continue doing an activity until marginal benefits equal marginal costs. If the marginal benefits are ever less than the marginal costs, don t do it! Economists call this being rational. Slide 10 Narrator: For example, yoga helps me feel good! But is going to a yoga class a good choice? First we have to estimate the Marginal Benefits of a class. Although subjective, it can be done. Slide 11 MB: $60 (worth the cost of a massage to me!)

4 Narrator: In my case, one hour of yoga makes me feel as if I had paid for a massage. This means I will be more relaxed and gentle with those around me! But how much would a massage typically cost me? About $60. Therefore, I know I value a yoga class as much as getting a massage! My Marginal Benefits then, are $60. What about Marginal Costs? Slide 12 MB: $60 (worth the cost of a massage to me!) MC: $44.88 Class dues: $15 Fuel: $2.44 x 2 = $4.88 Time away from family (2.5 hrs.) = $25 Why is this not priceless? Narrator: The individual class costs me $15, but then I have to consider fuel. For a round trip from my home I estimate about $4.88 in gas. But I also have to take time away from my family. How can I estimate this? Isn t it priceless? Not really, I am only taking one hour plus travel time, so how much would I be willing to pay to have that hour back? Again, this is subjective, but if you consider how much having that time back is worth to you, I am sure you could arrive at a dollar figure too! Slide 13 MB: $60 (worth the cost of a massage to me!) MC: $44.88 Class dues: $15 Fuel: $2.44 x 2 = $4.88 Time away from family (2.5 hrs.) = $25 Why is this not priceless? Since MB MC, it s a great choice! Narrator: So, Marginal Benefits are $60 and Marginal Costs are $ Since MB MC, it s a great choice! Slide 14 Title: Opportunity Cost All relevant costs must be considered There s no such thing as a free lunch! Opportunity cost

5 highest-valued, next-best alternative that must be sacrificed to attain something or to satisfy a want Image: Coupon with the word Free Lunch on it. Narrator: When making choices all relevant costs must be considered. We do have to recognize that There s no such thing as a free lunch! What do we mean by this? Well, even if you received a free lunch coupon, there s still an opportunity cost. Opportunity cost is the highest-valued, next-best alternative that must be sacrificed to attain something or satisfy a want. Slide 15 Title: Opportunity Cost Opportunity cost includes: Explicit costs: monetary costs (come out of pocket) Implicit costs: economic costs (alternative use costs) Yoga example, what was the implicit cost? Time away from family Alternative use of time Image: Hand pulling $20 out of a wallet full of money. Narrator: Opportunity cost includes explicit costs, which are monetary costs, things that come out of your pocket AND implicit costs, which we call economic costs, or alternative use costs. In my yoga example, what was my implicit cost? It was my time away from my family, or the alternative use of my time. Slide 16 Title: Your Turn to Think About It Image of a man sitting at a desk with a laptop, audio recording, and writing on a piece of paper. Narrator: Marginal analysis and opportunity cost can be applied to everyday choices you make, as well as those that impact your career, family, happiness, etc. The choices you make not only impact you but everyone around you. Slide 17 Title: Your Turn to Put It in Action! Our Creator blesses us with an abundance of resources. We foster a spirit of service to employ our resources for University and community development. We must be resourceful. We must optimize and apply all of the resources of our community to fulfill Saint Leo University s mission and goals. Image: Responsible Stewardship written out in wooden blocks. Narrator: Making rational choices allow us to live the Saint Leo core values more readily (especially responsible stewardship). Our Creator blesses us with an abundance of resources. We foster a spirit of service to employ our resources for University and community development. We must be resourceful. We

6 must optimize and apply all of the resources of our community to fulfill Saint Leo University s mission and goals. Slide 18 End of presentation.