Opportunity costs

LO:

• Define opportunity cost

• Identify and create examples of opportunity cost

What is opportunity cost?

Opportunity Cost: Value of next-best alternative lost when making a decision.

• Limited resources → choices → sacrifice second-best option.

Opportunity costs for individuals:

• every choice has opportunity cost

Identify:

• Limited resources.

• First option chosen.

• Value of next-best alternative (the opportunity cost).

Mnemonic for identification: Resources, Option Chosen, Alternative Lost.

Examples:

• Sleep instead of Economics class → Opportunity Cost: Value of learning missed.

  • Resource: Time.

  • First option: Sleeping.

  • Opportunity Cost: Learning.

• Spend income on video games instead of books → Opportunity Cost: Value of books.

  • Resource: Money.

  • First option: Video games.

  • Opportunity Cost: Books.

Opportunity costs for firms:

Firms : limited resources (labour, capital, land, enterprise, money).

Example: Produce small cars instead of large cars.

• First option: Small cars.

• Opportunity Cost: Value of large cars.

• If Small Car Profit = 2,000 , Large Car Profit = 1,800 → Opportunity Cost of small car: 1,800, assuming large cars are the next best option.

Rule: Benefit (first option) > Opportunity Cost (second best) -> best choice.