Opportunity Cost

Opportunity cost incorporates the notion of scarcity: No matter what we do, there is always a trade-off. We must trade off one thing for another because resources are limited and can be used in different ways.

1, we use up resources that could have been used to acquire something else. The 2 of opportunity cost allows us to measure this trade-off. Most decisions 3 several alternatives. For example, if you spend an hour studying for an economics exam, you have one fewer hour to 4 other activities. To 5 the opportunity cost of an activity, we look at what you consider the best of these “other” activities. For example, suppose the 6 to studying economics are studying for a history exam or working in a job that pays $10 per hour. If you consider studying for history a 7 use of your time than working, then the opportunity cost of studying economics is the four extra points you could have received on a history exam if you studied history instead of economics. Alternatively, if working is the best alternative, the opportunity cost of studying economics is the $10 you could have earned instead.