EP4

Agriculture Management, Economics, & SalesOpportunity Costs

Unit: Economic Principles in Agribusiness

Lesson Title: Opportunity Costs

Standards ABS.01.01.01.a. Recognize principles of capitalism as related to AFNR businesses.ABS.04.01.03.a. Explain the importance of return on investment for an agribusiness enterprise.ABS.01.02.01.c. Demonstrate entrepreneurship, including idea generation, opportunity analysis, and risk assessment.CS.01.04.03.a. Identify the consequences of personal actions.CS.01.04.03.b. Assess the alternative outcome of specific actions.

Missouri Personal Finance MM.2. Identify the opportunity costs of financial decisions.

CCSS.Math.Content.HSN-Q.A.1 Use units as a way to understand problems and to guide the solution of multi-step problems; choose and interpret units consistently in formulas; choose and interpret the scale and the origin in graphs and data displays.CCSS.Math.Content.HSS-IC.B.6 Evaluate reports based on data.

Student Learning Objectives

Slide 2 in Lesson 4 Opportunity Costs Lesson ObjectiveAfter completing the lesson on opportunity costs, students will demonstrate their ability to apply the concept in real-world situations by obtaining a minimum score of 80% on an Opportunity Cost Booklet.

Enabling ObjectivesAs a result of this lesson, the student will…

1. Recall the definition of opportunity cost and net opportunity cost.2. Identify two ways business decisions are affected by opportunity costs.3. Describe the effect of a manager or business owner not considering opportunity costs.4. Identify and calculate one measure used to represent opportunity costs.

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Time: Approximately 130 minutes

List of ResourcesBacon K., Boren N., Kirkwood V., Birkenholz R., Plain R., Rohrbach N.

(1988). Agriculture Management and Economics Instructor Guide.Columbia, MO: Instructional Materials Laboratory.

Bacon K., Boren N., Kirkwood V., Birkenholz R., Plain R., Rohrbach N. (1988). Agriculture Management and Economics Student Reference Guide. Columbia, MO: Instructional Materials Laboratory.

The Curators of the University of Missouri. (2012). Corn Crop Budget. Retrieved from http://agebb.missouri.edu/commag/crops/audit/corn.htm#budget.

The Curators of the University of Missouri. (2012). Sorghum Crop Budget. Retrieved from http://agebb.missouri.edu/commag/crops/audit/sorghum.htm#budget.

The Curators of the University of Missouri. (2012). Soybean Crop Budget. Retrieved from http://agebb.missouri.edu/commag/crops/audit/soybean.htm#budget.

The Curators of the University of Missouri. (2012). Corn Wheat Crop Budget. Retrieved from http://agebb.missouri.edu/commag/crops/audit/wheat.htm#budget.

Jobes R., Steward J., Casey J., Bangert L. (2011). Farm Business Management Student Guide. Moline: John Deere Publishing.

List of Tools, Equipment, and SuppliesEP4 PowerPoint PresentationEP4 Activity Sheet and Evaluation PacketNote cards or small sheets of paper for review activity

Key TermsSlide 3 in EP4 Opportunity Costs

The following terms are presented in this lesson (shown in bold italics): Opportunity CostsNet Opportunity CostsNet ReturnRate of Return on Investment

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Interest Approach: Use an interest approach that will prepare the students for the lesson. Teachers often develop approaches for their unique class and student situations. A possible approach is included here.

Slide 4 in EP4 Opportunity Costs Make Your Choice – Each student gets a scenario card from EP4.1 with two different options. After reading the scenario, weighing the options, and making their choices, students will present their choices to the class. The teacher will lead discussion on what each student chose and what they gave up by making that choice.

Listen For:Scenario 1: Determine the amount of money Hank could make working Friday night and

compare it to the amount of money he will spend on his date if he chooses not to work.

Scenario 2: Discuss the pros and cons to missing school and Josie’s review day. Discuss the benefits of attending the volleyball game – team unity, love watching the sport, etc.

Scenario 3: Jack could stay in shape for baseball if he goes out for basketball. Jack will be missing out on the money he could have made during basketball season. Jack will not have any free time to work out and/or lift weights in preparation for baseball season if he gets a job.

Scenario 4: Tuition at the community college will probably be cheaper than the four-year institution. Evan may be ready for a bigger change than the community college – it may not be a big enough challenge for him so he will get bored and not do well. Even with scholarships, Evan will have to take out loans to pay for the four-year college. Evan will not have to switch schools, become accustomed to a new social group or adjust to a new college environment if he goes to the four-year college initially.

Scenario 5: List all the “resume-building” opportunities Emma will have if she participates in a CDE. Emma will be losing out on all that money if she quits her job. Emma will have to find a new summer job if she quits at the day care – there are no guarantees she will be able to come back after contest season is over.

Scenario 6: Prices at convenience stores are higher than those at super markets. However, Mrs. Smith may find herself buying more items at the market that she wasn’t planning to buy. Mrs. Smith is worn out after a long day at work. Is it worth the extra money to make a quick stop and get home to her family faster?

Scenario 7: Mr. Brown will save money if he mows his own lawn. Mr. Brown has to have a couple of days to recover from his back pain if he mows his own lawn. His neighbor boy does a great job and may be faster and more efficient than Mr. Brown. Mr. Brown could use that time to do other things around his house – things that are more enjoyable and less painful.

Scenario 8: Are a few extra hours worth the loss in money Tyler will take if he schedules all of his classes for later in the day? Consider what Tyler will do with the extra hours in the morning – work, study, sleep, etc. Consider the amount of money Tyler may be missing out on if he can’t work as many hours at the admissions office.

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Summary of Content and Teaching StrategiesObjective 1: Recall the definition of opportunity cost and net opportunity cost.

Teaching Strategies Related Content1. Begin using the words “opportunity cost”

during the interest approach discussion.

2. Teach the definition of opportunity cost.

Slide 5 in EP4 Opportunity Costs

3. Have students identify the opportunity cost of their scenario cards used in the interest approach. Focus on scenario cards that highlight education past high school, summer employment, personal finances, etc.

Opportunity cost is the return that could be obtained if the resource were used in the next best alternative. In personal decision-making, opportunity

cost is what you decided not to do. In business and financial situations,

opportunity cost is the value of the best alternative not selected.

Businesses and individuals are forced to make decisions every day. With each decision comes profit or loss of money, positive or negative reactions, strengths and weaknesses, etc. A business must weigh each option and choose the one that is most beneficial or profitable for them. Their opportunity cost is the return or outcome that could have been obtained from choosing the other option.

Examples of Opportunity Costs For Businesses and Individuals A high school student could work every

night after school or participate in extra-curricular activities.

A high school student must decide what classes in which to enroll each year – sometimes there is a tough decision between different electives, advanced classes, college prep classes, etc.

A high school student has a savings account he/she has been building since they were toddlers. They have to decide if they should use the money to buy a new car or save it for college tuition.

Businesses are faced with two alternatives for investing money.

Farmers must decide whether to store or to market their grain.

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4. Have students complete EP4.2

Slide 6 in EP4 Opportunity Costs

5. Summarize the definition of net opportunity cost.

Slide 7 in EP4 Opportunity Costs

6. Use the table on EP4.2 to have students figure the net opportunity cost between the most profitable investment and investing in the bank.

Slide 8 in EP4 Opportunity Costs

Retail businesses must decide what materials/supplies will be regularly stocked in their store.

Farmers must decide what crop to plant each year.

Farmers must decide what brand of seed to use each year.

Farmers must decide whether or not to fertilize, spray, etc.

Students must determine what classes to take each year in order to fully prepare them for their job/career/continued education after high school.

Students must decide upon a post-secondary institution.

Determine the return of putting all the money in the bank.Determine the most profitable return.What is the opportunity cost of putting all the money in the bank?Net Opportunity Cost = Most profitable return – return from investing in the bank

Net opportunity cost is the difference between what is invested in and the alternative that is not chosen.

Objective 2: Identify two ways business decisions are affected by opportunity costs.

Teaching Strategies Related Content1. Have students name three or four local

businesses, both agricultural and non-agricultural. Take a look at each business and answer the question: “How are a business owner’s decisions affected by opportunity costs?”

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2. All business decisions involve limited resources – land, labor, and capital.

Slide 9 in EP4 Opportunity Costs

3. Each business must find the right mixture of these resources to continue earning a profit. A manager may have the time and

labor to paint his/her storefront each year, but the company’s capital may be better spent on advertising and public relations. The manager must decide what is worth more to the company: new coats of paint every year or enhanced advertising and publicity that could generate increased sales. In other words, which of these will have a greater return on investment?

4. Discuss with students what some other choices business owners/managers have to make that could be affected by opportunity costs.

Business decisions and opportunity costs Land – A limited amount is available

that is suitable for a particular type of business, whether it be for grain production, pasture, livestock production, a greenhouse business, a landscaping business, etc.

Labor – There is a limited amount of properly trained people to do specific tasks for the business.

Capital – As money is borrowed, interest rates will be affected. As interest rates increase, it will become less profitable to borrow money.

Listen for A farmer takes out a loan to purchase

more farm ground. A floral shop takes out an ad in the

local newspaper. A landscaping business runs an

advertisement on TV. A seed dealership re-shingles the

storage-shed roof.

Objective 3: Describe the effect of a manager not considering opportunity costs.

Teaching Strategies Related Content

1. Use the local businesses identified in objective 2 and ask students, “What if these managers did not consider

A manager may miss an opportunity to make a greater profit.

A manager must try to avoid costly

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opportunity costs. How would their business be affected?”

Slide 10 in EP4 Opportunity Costs

2. Think about what it takes to run a business. What are some things about running a business that have changed over the past 10 years? 20 years?

3. Discuss with students, “What would the effects be on a business that chose to continue to use the same business practices of the past?”

mistakes while trying to keep a business as profitable as possible.

Listen for Customers pay with credit and debit

cards instead of cash or check. Transactions are made on computer

instead of using carbon copy paper. Computer systems, yield monitors, etc.

are used to make farmers more efficient.

Listen for: They would miss out on the increased

profit from using updated technology. Customers may choose to shop

elsewhere if they can only pay with cash or check.

Objective 4: Identify and calculate one measure used to represent opportunity costs.

Teaching Strategies Related Content1. Have students refer back to their

scenario cards from the interest approach. Facilitate a discussion around the question, “Given the situation on your card, how would opportunity costs be calculated?”

Slide 11 in EP4 Opportunity Costs

2. Use EP4.3 to have students practice figuring net return and rate of return on investment.

Slide 12-14 in EP4 Opportunity Costs

Calculating opportunity costsNet Return

Used when resources are not a constraint.

Used when opportunities available require the same amount of investment.

Net Return = Return – Expense

Rate of Return on Investment Used when resources are limited. Used when opportunities available

require different amounts of investment.

Rate of Return on Investment = Net Return/Expense

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Review/SummarySlide 15 in EP4 Opportunity Costs

All decisions have some costs associated with them, and the opportunity costs for making those decisions need to be considered.

Review

Slide 16 in EP4 Opportunity CostsUse PPT slide to have students answer review questions orally or individually on a sheet of notebook paper.

Slide 17 in EP4 Opportunity CostsExit cards: Students will answer the following questions on a note card or small slip of paper and hand to teacher as they exit:

What did you learn today about opportunity costs? What questions do you still have about opportunity costs or how to calculate opportunity

costs?

Application

Extended ActivitiesEach student chooses one FFA activity commonly done by the local FFA chapter each year. Have students brainstorm an alternative activity that could replace the one chosen. Identify the opportunity costs associated with implementing the alternative activity instead of the one done each year. Present findings to the class.

Students will identify five alternative options for their SAE and create a PowerPoint presentation depicting the opportunity costs associated with each of the alternative options.

Students will review recent record book entries, choose a decision they made, and evaluate the opportunity costs of that decision. Complete a one-page paper analyzing whether or not the decision made was good or bad in terms of the opportunity cost of the decision.

Have students complete the practice questions related to opportunity cost from the Farm Management CDE using Worksheet 4.6. NOTE: Additional instruction may be necessary to answer all of the questions on this practice worksheet.Worksheet 4.6 Answers: 1. C 2. B 3. C 4. C

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EvaluationOpportunity Cost Booklet Project Based Evaluation EP4.4

Alternate - Paper-pencil Quiz Evaluation EP4.5

Answers to EvaluationEvaluation EP4.4Answers will vary. Use scoring guide at the bottom of EP4.4 to assess student work.

Alternate Evaluation EP4.51. The return that could be obtained if a resource were used in the next best alternative2. All business decisions involve limited resources that a manager must allocate in order to

maintain a profit.3. They may miss out on an opportunity to make a greater profit. 4. Returns – Expenses = Net Return5. Net Return / Expenses = Rate of Return on Investment6. B7. A8. C9. Land, Labor, Capital10. Net Return and Rate of Return on Investment

Economic Principles in Agriculture EP4 Opportunity Costs