Opportunity Cost and Real Value (Video Notes)

A set of question-and-answer flashcards covering key concepts like opportunity cost, its difference from accounting costs, real value, and decision-making considerations from the video notes.

What is opportunity cost?

The sacrifice or next-best alternative you forgo when choosing something; the value of the alternative use of resources.

How does opportunity cost differ from conventional accounting cost?

Opportunity cost includes the value of the next best alternative, not just the monetary outlay; it reflects foregone benefits.

Provide an everyday example illustrating opportunity cost.

Buying a new iPhone may mean giving up time with friends or other activities; there is always a trade-off, i.e., no free lunch.

What does the phrase 'no free lunch' imply in economics?

Every choice has a cost; choosing one option requires sacrificing something else (the opportunity cost).

How is the real value of money determined?

By its purchasing power—the goods and services it can buy, not just the nominal currency amount.

What should be considered when evaluating the costs of alternatives?

The opportunity cost—the value of the next best use of resources; consider all possible alternatives and sacrifices.

What does 'the next best alternative use of resources' mean?

The most valuable alternative you give up when you choose a particular option.

What is meant by purchasing power when comparing costs over time or across currencies?

Express value in terms of what money can buy, i.e., its purchasing power, rather than the face currency value.

What common error should be avoided when counting costs in decision making?

Ignoring opportunity costs and focusing only on explicit monetary costs.