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1.3.1 Defining Opportunity Cost

The document defines opportunity cost as the next best forgone option when making a choice to allocate scarce resources. It provides examples of opportunity cost for consumers, workers, producers, and governments. For consumers, the opportunity cost of buying a PS4 is a Nintendo Switch. For workers, the opportunity cost of becoming a waiter is being a librarian. For producers, the opportunity cost of producing smartphones is producing laptops. For governments, the opportunity cost of improving healthcare is improving education. Opportunity cost helps explain the influence of scarcity on decision making for individuals and societies.

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38 views

1.3.1 Defining Opportunity Cost

The document defines opportunity cost as the next best forgone option when making a choice to allocate scarce resources. It provides examples of opportunity cost for consumers, workers, producers, and governments. For consumers, the opportunity cost of buying a PS4 is a Nintendo Switch. For workers, the opportunity cost of becoming a waiter is being a librarian. For producers, the opportunity cost of producing smartphones is producing laptops. For governments, the opportunity cost of improving healthcare is improving education. Opportunity cost helps explain the influence of scarcity on decision making for individuals and societies.

Uploaded by

Anushka
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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1.3.

Opportunity Cost

Learning Outcomes:

• Definition and examples of opportunity cost in different contexts.


• Decisions made by consumers, workers, producers and governments when allocating their
resources.

1.3.1 DEFINING OPPORTUNITY COST


Since resources are scarce, we need to make choices to allocate our resources and determine which
goods and services to produce. However, when we make choices, we have to give up the benefits of
our next best option. This is the opportunity cost.
For instance, during your lunch breaks, you
have exactly 1 hour of free time. Should you
use this free time to study or to watch 2
episodes of TV (assuming each episode lasts 30
minutes). In this case, the opportunity cost of
studying for an hour is watching 2 TV episodes.
In other words, you’ll have to give up watching
those 2 episodes if you choose to study.
However, note that opportunity cost does not
include the costs associated with the selected option. For instance, if you chose TV, the cost of buying
the TV is not opportunity cost because the cost is irrecoverable.

Exercise 1.3.1: Opportunity Cost

For each of the following examples, identify the scarce resource and the opportunity cost of the choice. The
first one has been done for you.

Individual Choice Scarce Resource Opportunity Cost

Consumer A consumer has just enough money to buy Money Nintendo Switch
either a Nintendo Switch or a PS4 and
decided to go with the PS4.

Worker A worker only has time to work one job so


he chose to become a waiter instead of a
librarian.

Producer A manufacturer has available capacity to


produce either laptops or smartphones
and decided to go with smartphones.

Government Government has just enough budget to


either improve education or healthcare
and decided to spend on healthcare.

1
1.3.2 INFLUENCE OF OPPORTUNITY COST ON DECISION MAKING
Availability of Resources
Everybody makes choices on a daily basis, but some have more than others. Consumers in developed
countries enjoy a greater choice of goods and services than those from the less-developed world
simply because they have more resources available. If you were living in the US, you can choose to eat
practically anything you wish by visiting the supermarket or any local restaurant. On the other hand,
if you were living in one of the poorest countries in Africa, you’d have no choice, but to eat whatever’s
available. Clearly, you would be much better off living in countries with abundant resources.
Nevertheless, both rich and poor countries want more resources than are available.
Conflict of Interest
By allocating resources, this also creates conflict of
interest. Suppose you own an acre of farmland,
which assumedly is only enough to produce either
1,000 tomatoes or raise 100 cows. If you choose
tomatoes over cows, people may not be able to
enjoy enough protein in their diets. However, if you
choose cows over tomatoes, environmentalists may
not be too pleased with the overgrazing and
enhanced greenhouse gas emissions.
The bottom line is, choosing alternate uses of scarce
resources inevitably leads to conflict of interest.
Some people may benefit from that choice while
others are adversely affected. People cannot always get what they want. In economics, we will decide
how to best allocate scarce resources in order to satisfy as many wants as possible.

Exercise 1.3.2: Cakes by Hernandez (cont.)


Maria and Marco have hired you as a business consultant to help them make the decision between
expanding and purchasing new equipment for the El Paso store or opening a new branch in Dallas. What
advice would you give them? Justify your response.

Advice: __________________________________________________________________________________
Justification:
_________________________________________________________________________________________
_________________________________________________________________________________________
Describe the opportunity cost of your suggestion.
_________________________________________________________________________________________
_________________________________________________________________________________________

Master Your Definitions


Opportunity Cost: the next best forgone option when making a choice in allocating resources.

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