Opportunity Cost and Tradeoffs

- [Tyler] Once you master
the economic way of thinking,

you'll see the world
in a very different way.

Two fundamental economic concepts
are everywhere you look --

opportunity costs, and tradeoffs.

Let's start with opportunity costs.

At this busy coffee shop,

opportunity costs lie
behind every decision.

Like for Jenny -- she's here
for her third date with Adam.

Was that a good decision?

After all, economics is
all about studying decisions.

Making a good decision is
about comparing the benefits

of that decision to the costs.

The obvious costs for this date

for Jenny were the Uber ride
she paid for to get here,

and her grande chai tea latte
with whole milk.

But what's missing?

Her opportunity cost.

Opportunity cost means the value
of the next best alternative.

For instance, instead of going
on her third date with Adam,

Jenny could've been binge watching
her favorite tv show.

She might've been
on a first date instead,

with Roman.

Or she might've been
having breakfast

with her very sweet sister.

Let's say her next best option

would've been
breakfast with her sister.

Does the benefit
of this third date with Adam

outweigh the opportunity cost?

It might seem strange
to think this way about romance,

and it doesn't mean it's
about calculating every decision

to the last penny.

Nonetheless, Jenny's time,
attention and energy --

those are scarce.

And if she doesn't consider
the alternatives at all,

she might be wasting
parts of her life.

There's another
fundamental related concept

from economics -- tradeoffs.

Take these sprinklers
in the ceiling of the coffee shop,

foe example.

Adding sprinklers can
make it safer during a fire,

but they also can cost
a lot of money to install.

How much cheaper would
the coffee be without them?

In a world of scarce resources,
one typically has to choose.

There's a tradeoff --
safer buildings cost more,

but that means the coffee can
be more expensive.

The line is out the door here.

Perhaps the owner has considered
opening a second location.

As the building code however
becomes more stringent,

the cost of opening
an additional location goes up.

It's not just the direct
monetary costs of paying

for things like sprinklers.

It's also the opportunity costs
of the extra time and effort

to file permits, manage the work
and schedule inspections.