Scarcity and opportunity cost the economic problem key economic concepts made easy these worksheets and the powerpoint were designed to assist with the teaching of key economic concepts that many students struggle with. A fundamental principle of economics is that every choice has an opportunity cost. We use your linkedin profile and activity data to personalize ads and to show you more relevant ads. In economics, there is no such thing as a free lunch. It is within the context of scarcity that economists define what is perhaps the most important concept in all of economics, the concept of opportunity cost. Department of economics, nnamdi azikiwe university awka nigeria, pp. Scarcity, choice, opportunity costs and ppc homework. Cost mises wiki, the global repository of classical. Timescale over what period is the opportunity cost being measured. The opportunity cost of investing in a healthcare intervention is best measured by the health benefits life years saved, quality adjusted life years qalys gained that could have been achieved had. The concepts of scarcity, choice, and opportunity cost are at the heart of economics. Opportunity cost principle economics l concepts l topics l. Opportunity cost is the value of the best alternative forgone in making any choice.
The definition of opportunity cost is the value of any alternative you must give up when you make a choice. Opportunity cost meaning in the cambridge english dictionary. The opportunity cost of protecting all ranges by excluding new development, in terms of the net present value of petroleum and forestry resources, was estimated to be in excess of 100 billion. Dear bba students, here i am sharing an excellent pdf ebook containing the notes for managerial economics as per the bba course. Opportunity cost is the value of something when a certain course of action is chosen. If you decide to spend two hours studying on a friday night. The opportunity cost of a puppy includes not just the purchase price but the food, veterinary bills, carpet cleaning, and time value of training as well. Meaning of opportunity cost and its economic significance. Economics notes opportunity cost stephen palmer, james raftery the concept of opportunity cost is fundamental to the economists view of costs. Opportunity cost opportunity cost is the value of what is foregone in order to have something else. This lesson explores the concept of opportunity cost and, more specifically, in the context of the decision to go to college.
Discussion of the opportunity cost concept 74 the opportunity cost concept from an accounting perspective 78 functions of the accounting craft 79 the relevant cost concept and the opportunity cost concept 83 the classification of costs 89 irrelevance of the accountants approach 93 the economists view where the differences are 99. Capital, enterprise, land and labour are scarce and so decisions have to be made about the method and. Hosp 2207 economics learning centre microeconomics. Surveys by ferraro and taylor 2005 point to abysmal understandings of the concept of opportunity cost by us faculty, graduates and undergraduates. Opportunity cost definition and real world examples youtube. In this activity, students apply the concept of opportunity cost to the economic decision of going to college. Stated differently, an opportunity cost represents an alternative given up. How much people should sell and the prices they should be willing to.
If no object or activity that is valued by anyone is scarce, all demands for all persons and in all periods can be satisfied. The opportunity cost is that you cannot have those two hours for leisure. But the definition of the term continues to be both unclear and controversial. Jun 05, 1999 when two or more interventions are compared cost utility effectiveness analysis makes the opportunity cost of the alternative uses of resources explicit. Michael munger, chair of political science at duke university, in his online article a fable of the oc, published at the library of economics and liberty, provides some fascinating insights into. Pdf on jul 1, 1999, s palmer and others published economic notes. After three hours, the additional benefit from staying an additional halfhour would likely be less than the additional cost. Opportunity cost is the value of the next best alternative forgone as a result of making a decision. Explicit costs are opportunity costs that involve direct monetary payment by producers. List three factors that make it hard to assess the opportunity cost of a decision a.
Of the 76% of the class who had previously taken an economics course. Opportunity cost is the value of the forgone alternative what you gave up when you got something. All outputs are available to download from ffis livelihoods and governance library. Gregory mankiws principles of microeconomics, 2nd edition, chapter 1 p. There are not enough economic resources to produce all the goods and services we would desire. Since resources are scarce relative to needs,1 the use of resources in one way pre vents their use in other ways. The benefit or value that was given up can refer to decisions in your personal life, in an organization, in the country or the economy, or in the environment, or on the governmental level. Michael munger, chair of political science at duke university, in his online article a fable of the oc, published at the library of economics and liberty, provides some fascinating insights into opportunity cost. Opportunity cost is not what you choose when you make a choice it is what you did not choose in making a choice. Dec 06, 2019 definition opportunity cost is the next best alternative foregone. Its called opportunity cost, one of the truly epic insights that economics brought the world. Economists use the term opportunity cost to indicate what must be given up to obtain something thats desired.
Using production possibility fontiers to explain opportunity cost. A historical introduction of the opportunity cost concept. Even if we are not asked to pay money for something, scarce resources are used up in production and there is an opportunity cost involved. The concept of opportunity cost is fundamental to the economists view of costs. Webster 2008 definition of the term costs, which is. Take the day to catch up on anything you may not have completed last week. Importance of financial v nonfinancial rewards which is most important. More specifically, it is the value of the next best alternative. This is the sixth in a series of occasional notes on economics the concept of opportunity cost is fundamental to the economists. Definition opportunity cost is the next best alternative foregone. The benefit or value that was given up can refer to decisions in your personal life, in an organization, in the country or the economy, or in the environment, or on the. Students identify the opportunity cost of some simple and some difficult decisions. Explain the concept of opportunity cost and explain why accounting profits and economic profits are not the same.
Jun 25, 2019 opportunity cost refers to a benefit that a person could have received, but gave up, to take another course of action. It is one of the most important subjects of bba and these brief notes will help you study quickly for your managerial economics exam. The opportunity cost, when performing an action, is the value attributable to the best alternative foregone. The story can be used to discuss the concepts of opportunity cost and normal profit. Economics, scarcity and opportunity cost, the economic problem. These digital social studies activities cover the economics concepts economic choice, opportunity cost, and scarcity. The opportunity cost of any choice is the value of the best alternative forgone in making it. For example, devoting the scarce resource of time to study economics means less time devoted to sleep. We all have limited resources and have to decide how we are to use them. Lyft drivers have a profound understanding of opportunity cost.
After three hours, the additional benefit from staying an. Can the united states economy support financial stability for all of its citizens. How can this quote be explained in terms of opportunity. In other words, it is the opportunities an actor has given up for something else introductory example. The study of opportunity cost chapter 01 economics. The existence of alternative uses forces us to make choices.
The concept of opportunity cost occupies an important place in economic theory. The problem with the world is that there will always be unlimited wants, but we have limited or scarce resources to meet those wants. Learn the most important concept of economics through the use of realworld scenarios that highlight both the benefits and the costs of decisions. This is an economics reinforcement activity on costs, benefits and opportunity cost. Because of scarcity, people are faced with tradeoffs in how they use their limited resources. If you sleep through your economics class not recommended, by the way, the opportunity cost is the learning you miss. Thus the opportunity cost of the computer is the income expected from the xerox machine. Opportunity cost principle economics l concepts l topics. I propose a practical way for educators to clarify the concept and related. Here are some additional resources related to opportunity cost, scarcity, and choice. Opportunity cost economics online economics online. The concept of opportunity cost or alternative cost expresses the basic relationship between scarcity and choice.
Economics, as we are starting to see, is about the making of choices and the taking of decisions. You may, for instance, forgo ice cream in order to have an extra helping of mashed potatoes. Opportunity cost refers to a benefit that a person could have received, but gave up, to take another course of action. In business circles, the opportunity cost is known as economic cost and its existence is limited to the. The explicit opportunity cost of the factors of production not already owned by a producer is the price that the producer has to pay for them. Students will evaluate the costs and benefits in given scenarios in order to make the best decision. There is a cost to every action and even nonaction because of the passage of time. This worksheet takes students through a step by step process to calculate this cost. The opportunity cost of investing in a healthcare intervention is best measured. How much people should buy and the prices they should be willing to pay b. And that cost is what you have given up in order to do what you are doing. Since resources are scarce relative to needs, 1 the use of resources in one way prevents their use in other ways. I have linked some examples for the demand, supply, and combining supply and demand assignments from last week below to help for those of you who may need it, or to be used. Rather, in its place they have substituted opportunity or alternative cost.
Download important questions for class 12 economics micro and macro pdf chapterwise absolutely free. A good is scarce if the choice of one alternative requires that another be given up. Important questions for class 12 economics pdf download. Given that opportunity cost is widely believed to be fundamental to economic thinking, this empirical evidence raises important teaching and conceptual issues. Opportunity cost is a direct implication of scarcity. A public interest group claims that pharmaceutical companies overstate the costs of developing drugs because they include the foregone earnings from the money invested in drug development. I describe how the term is widely used in two distinct ways, both in academic and nonacademic contexts. Then, they apply their understanding of opportunity cost to the college. Ppcshows all the possible combinations of 2 goods or services. Opportunity cost is widely considered to be a fundamental concept in economics.
Modern economists have rejected the labor and sacrifices nexus to represent real cost. Uncertainty no guarantee that other decisions will prove better b. The study of opportunity cost multiple choice questions 1. I have linked some examples for the demand, supply, and combining supply and demand assignments from last week below to help for those of you who may need it, or to be used as a check to make sure you are on the right track. After lecturing on the concepts of opportunity cost or normal profit, the instructor plays the story rx drug costs, which was broadcast on the national public radio news program all things considered. The concept of opportunity cost microeconomics reading. Opportunity cost formula step by step calculation examples. One implication is that the concept is poorly taught in textbooks and classrooms from. Opportunity cost this concept of scarcity leads to the idea of opportunity cost. It is a central concept in economics, and if often regarded as the true cost of an economic decision. Opportunity cost definitionopportunity cost is the sacrifice made in making an economic decision, expressed in terms of the next best available alternative foregone. They examine both the opportunity cost of going to a college of their choice, and not going to college. Pdf bba managerial economics notes, ebook free download.
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