Economics / Unit 1: Scarcity, Choices and Opportunity Cost
1.3 Opportunity Cost and Trade-offs
Notes
- A trade-off is all the alternatives you give up when you make a choice.
- Opportunity cost is the value of the single next-best alternative you give up. It is not the total of every alternative.
- Opportunity cost includes time as well as money. "There is no such thing as a free lunch": even free things cost time.
- Worked example: Jordan can work a 4-hour shift paying $15 per hour or go to a free concert. The opportunity cost of the concert is the $60 in wages he gives up ($4 \times 15 = 60$). If the ticket cost $25, the full cost of going would be $25 + $60 = $85.
- A decision-making grid lists alternatives and the criteria used to judge them.
- Sunk costs are costs already paid that cannot be recovered. A rational decision ignores them and looks only at future costs and benefits.
Practice
Ava ranks her Saturday options: (1) babysit for $50, (2) go to the beach, (3) study. She chooses to babysit. What is her opportunity cost?
Opportunity cost is only the next-best alternative, which is the beach.
Leo quits a summer job paying $300 a week to attend a 10-week program with $1,000 tuition. Counting opportunity cost, what does the program really cost him?
Tuition plus lost wages: $1{,}000 + 300 \times 10 = 4{,}000$.
You paid $20 for a nonrefundable movie ticket, then feel sick. How would an economist advise you to decide whether to go?
The $20 is gone whatever you choose, so it should not affect the decision.
Ready for more? Take the Unit 1 test.