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Economics

Opportunity cost: what you give up

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When you choose one thing, you give up the chance to do something else.

You can only spend the same money once. When you spend it on one thing, it is no longer available for something else.

Opportunity cost is the value of the best other choice you give up. It is not an extra bill. It is what you miss out on because of your decision.

A simple example

You have $300 left after paying your bills. You could buy a new phone or spend a weekend away with friends. Either choice would use the whole $300, so you cannot do both.

You choose the phone. The price is $300. The opportunity cost is the weekend with friends you gave up. If you choose the weekend instead, you give up the new phone.

Principles

  • The cost of a choice includes the best alternative you give up.
  • Compare competing uses of limited money, time, and resources before making a commitment.

Why this matters

  • We must compare each choice with the best alternative we would give up.
  • Spend limited time, money, and resources only after deciding that the result is worth that sacrifice.
Learn more & discuss

The same idea applies to time. An evening spent doing one thing cannot also be spent doing something else. If you have several options, the opportunity cost is the best alternative you would actually choose, not every possible alternative added together.

Discussion questions

For individual reflection or classroom discussion. These questions are not graded.

  1. Think of something you recently bought. What was the best other use for that money?
  2. Would you still make that purchase after thinking about what you gave up?
  3. What do you give up when you choose how to spend a free evening?

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Check your understanding

You can afford either a new phone or a weekend with friends. The weekend is your best other choice. If you buy the phone, what is the opportunity cost?
An extra fee charged by the phone shop.
The value of the weekend with friends you gave up.
Nothing, because you had enough money for the phone.

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