Opportunity Cost and Related Concepts (Lecture Notes on Economic Decision Making)

Vocabulary flashcards covering key terms from the lecture notes on opportunity cost, marginal thinking, and the role of trade and specialization in economic decision making.

What is Opportunity Cost?

It is the value of the next best alternative foregone when making a choice; includes monetary and nonmonetary costs such as time and resources.

What is the Next Best Alternative?

It is the best alternative option not chosen when making a decision, used to measure opportunity cost.

How do Time and Monetary Opportunity Costs relate to opportunity cost?

Opportunity cost includes both how you spend money and how you spend time—the foregone value of the alternative use of each.

What is Marginal Thinking?

It is weighing the benefits and costs of one additional unit of something; act if the marginal benefit exceeds the marginal cost.

Define Marginal Benefit.

It is the additional benefit obtained from consuming or producing one more unit of a good or activity.

Define Marginal Cost.

It is the additional cost incurred by producing or consuming one more unit of a good or activity.

What is Specialization?

It is focusing production on goods or tasks you are best at, which enables gains from trade through exchange.

What is Trade?

It is the voluntary exchange of goods or services between individuals or countries that allows more efficient allocation of resources.

What is Voluntary Exchange?

It is a transaction where both parties expect to be better off as a result of the trade.

What are Gains from Trade?

They are the overall welfare improvement from specialization and exchange, though some groups may temporarily lose.

What is Comparative Advantage?

It is the ability to produce a good at a lower opportunity cost than others, enabling efficient trade.

Who are the Winners and Losers in Trade?

Trade can create overall gains, but some individuals or sectors may lose; policies may aim to compensate losers.

What is an Explicit Cost?

It is the actual monetary outlays required to obtain a good or service (e.g., gas, tickets, books).

What is an Implicit Cost (Nonmonetary Cost)?

It refers to nonmonetary sacrifices in opportunity cost, such as time or foregone activities, not paid as explicit money outlays.