Opportunity Cost

Opportunity Cost:
the best alternative that we forgo, or give up, when we make a choice or a decision. 

Every decision means giving up something.  Economists are fond of trade-offs as a way of thinking about decision making.  Taking one action usually means giving up something else. 

As the text states, “The full ‘cost’ of making a specific choice includes [the value of] what we give up by not making the best alternative choice.”

Opportunity costs arise because resources are scarce. Scarce means limited.  Resources are scarce because human wants exceed what we can produce from our current resources.

Preliminaries | Concept of Trade-Offs

Discuss the concept of trade-offs from an economic theory perspective, and give three examples of trade-offs that a consumer, a worker or a firm might make.

Your Answer:

Resources are scarce, and so when consumers, businesses and workers choose to do one thing with their time and resources, they are choosing not to do other things. 

Consumers must choose which goods or services they will buy and which they will forgo. 

Workers decide which type of work they will do, or even if they will work at all. Workers might also choose not to work or work less in order to pursue additional training. 

Firms must decide which market they will produce goods or services for, and how much they will produce. When market conditions change and profitability changes, they may choose to leave or enter a market.

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Source: Pindyck / Rubinfeld, Microeconomics, 7th edition, Pearson

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