Opportunity Cost
Trade-Offs
• Everyone gives up alternatives when we
choose one action over another
– Individuals
– Businesses
– large groups of people that form
governments
• Choosing to study rather than
sleeping
• Choosing to produce one product
over another
• Countries will choose to produce
more military goods instead of
devoting resources to consumer
goods
What is Opportunity Cost
• It is the alternative given up that is
more desirable than all the others
– Spending more money on defense
(guns) than on universal health
care (butter)
– Everything depends on the
specific opportunity cost
• whatever you are willing to
sacrifice
Choosing is Refusing!
Thinking at the Margin
• Making a decision based on more or less than is thinking
on the margin
– Decision makers just have to compare what they will sacrifice &
what they will gain
• 1hr of study = C grade on a test
– Opportunity cost = + One hour of sleep
• 2 hr of study = B grade on a test
– Opportunity cost = + 2 hour of sleep
• 3rd hr of study = A grade on a test
– Opportunity cost = + 3 hours of sleep