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Ch#03 - Opportunity Cost

Opportunity cost refers to the value of the best alternative forgone when making a decision, impacting consumers, workers, producers, and governments. Each group must weigh their options carefully, as choosing one alternative often means giving up another with potential benefits. Economic goods involve opportunity costs due to their production using scarce resources, while free goods do not incur such costs.

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12 views2 pages

Ch#03 - Opportunity Cost

Opportunity cost refers to the value of the best alternative forgone when making a decision, impacting consumers, workers, producers, and governments. Each group must weigh their options carefully, as choosing one alternative often means giving up another with potential benefits. Economic goods involve opportunity costs due to their production using scarce resources, while free goods do not incur such costs.

Uploaded by

arslan.mustafa9199
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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3.

1 The Meaning of Opportunity Cost

 Every decision involves giving up an alternative.


 Opportunity cost is the value of the best alternative forgone when a choice is made.
 Example: If you choose to read a chapter of an economics book instead of visiting a
friend between 5–6 pm, your opportunity cost is the time with your friend (and vice
versa).
 Making good decisions means carefully weighing all alternatives, especially the best
one.

3.2 Influence of Opportunity Cost on Decision Making

Opportunity Cost and Consumers

 Consumers must often choose between different products.


 Example: Choosing between two economics dictionaries based on:
o Price
o Quality
o Content coverage
 The closer the two options are in value, the harder the decision.
 The opportunity cost is the value of the dictionary not chosen.

Opportunity Cost and Workers

 Choosing one job means giving up another.


 Example: A person can choose to be a teacher or a civil servant.
o Factors influencing the decision:
 Wages
 Promotion chances
 Job satisfaction
 If another job offers better conditions or pay, the opportunity cost of staying in the
current job increases.
 This may lead some workers to switch careers.

Opportunity Cost and Producers

 Producers must decide how to use their resources (land, labour, capital).
 Example:
o A farmer who plants sugar beet cannot use the same field for cattle.
o A car manufacturer using factory space to make one car model cannot use it for
another model at the same time.
 Businesses usually choose the option that maximizes profit, considering:
o Demand
o Production costs
o Potential returns

Opportunity Cost and the Government

 The government must decide how to spend tax revenue.


 Example:
o Spending more on education might mean spending less on healthcare.
o If it raises taxes to increase spending, the opportunity cost is on the taxpayers.
 People may have to reduce personal spending or saving.

Economic Goods and Free Goods

 Economic goods:
o Are produced using scarce resources.
o Their production involves an opportunity cost (since resources used for them
could be used elsewhere).
 Free goods:
o Are not produced using scarce resources.
o They have no opportunity cost.
o Examples: Air, sunlight, rainwater in certain areas.

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