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Opportunity Cost for Students and Learners
- 1. Dr. Sylvain Hours econdoctor.com 3 COURSE:IGCSE ECONOMICS (0455) CHAPTER: 1 – The Basic Economic Problem TOPIC: 1.3 – Opportunity Cost Last edited: June 2022
- 2. Dr. Sylvain Hours econdoctor.com Outline 1.3 - Opportunity Cost 1.3.1 - Definition of opportunity cost 1.3.2 - The influence of opportunity cost on decision making 1.1.2 - Economic and Free Goods
- 3. Dr. Sylvain Hours econdoctor.com OpportunityCost A decision (or choice) is a cognitive process resulting in the selection of an action among mutually exclusive alternatives. Economic agents rank these alternatives in terms of how much benefit they provide, and they select the best alternative. The Opportunity Cost (OC) of a decision is equal to the lost benefit of the second-best alternative. Task: Discuss the opportunity costs of (i) ordering lasagna in a restaurant, (ii) studying AS Economics, and (iii) travelling to Hainan during the summer holiday.
- 4. Dr. Sylvain Hours econdoctor.com ImpossibleTrinity GOOD GRADES SOCIAL LIFE ENOUGH SLEEP CHOOSE TWO
- 5. Dr. Sylvain Hours econdoctor.com OpportunityCost: Example 1 Cindy must decide what to do with her own labour over a 2-hour period of time tonight. She can either (i) clean up her room, (ii) do her homework or (iii) practice piano. She prefers to practice piano rather than cleaning up her room, and she prefers to clean up her room rather than doing her homework. What is the OC of practicing piano? The OC of practicing piano is equal to the lost benefit of a clean room.
- 6. Dr. Sylvain Hours econdoctor.com OpportunityCost: Example 2 A firm must decide what to do with some vacant office space. It can either use it to create (i) a break room, (ii) a storage room or (iii) a print room. It prefers to create a print room rather than a break room, and it prefers to create a break room rather than a storage room. What is the OC of creating a print room? The OC of creating a print room is equal to the lost benefit of a break room.
- 7. Dr. Sylvain Hours econdoctor.com OpportunityCost: Example 3 A government must decide what to do with a natural area within a national park. It can either (i) conserve it, (ii) engage in open-cast coal mining, or (iii) build a hydroelectric dam and flood the area. It prefers to conserve it rather than building the dam, and it prefers to build the dam rather than mining coal. What is the OC of conserving the natural area? The OC of conserving the natural area is the lost benefit of the hydroelectric dam.
- 8. Dr. Sylvain Hours econdoctor.com Economicvs Free Goods As we saw earlier, a scarce resource is one which is not available in sufficient quantity to produce all of the goods and services that we need or want, and which require the use of this particular resource. The use of a scarce resources involves an OC. For example, consider a small island where the population is relatively large, so land can be expected to be a scarce resource. Therefore, if the decision is made to use 100 acres of land to build a stadium, then this land will no longer be available for farming or residential purposes.
- 9. Dr. Sylvain Hours econdoctor.com Economicvs Free Goods Since land on this island is a scarce resource, its use in the production of a given good or service will involve an OC, because it will necessarily reduce the output of other goods and services. An economic good is a good or service using scarce resources during its production. Most resources are scarce, and so the vast majority of goods and services are economic goods. Clearly, since economic goods require the use of scarce resources, their production involve an OC.
- 10. Dr. Sylvain Hours econdoctor.com Economicvs Free Goods A resource which is not scarce is sometimes known as a free resource. The use of a free resource does NOT involve an OC. For example, consider a large island where the population is relatively small, so land can be expected to be a free resource. If the decision is made to use 100 acres of land to build a stadium, then this land will no longer be available for farming or residential purposes. However, since we have enough land to produce all of the goods and services that we need or want, then its use in the production of a given good or service will not involve any OC, because it will not reduce the output of other goods and services.
- 11. Dr. Sylvain Hours econdoctor.com Economicvs Free Goods A free good is a good or service using ONLY free resources during its production. Clearly, since free goods do not require the use of scarce resources, their production does not involve any OC. Most free goods are abundant natural resources which can be consumed as such. In other words, free goods do not need to be manufactured (i.e. transformed into a product suitable for use). Examples of free goods include air, sunlight, water, etc. Remark: In economics, a free good is NOT a good whose price is zero.