The Economic Way of Thinking
1. Economic Problem: Scarcity requires Choices
2. Economic Decision – making:
2.1 Opportunity Cost
What one forgoes (gives up) by not taking the best alternative action
CompareAdditional Benefits withAdditional Costs
Ignore Sunk Costs
Limited resources to produce goods
Study of how rational people make choice
Opportunity Cost and MarginalAnalysis
Logical thinking in economic context
The Opportunity cost of an action is what one forgoes by not taking the best alternative
1. the question “should I do X?” should be replaced by “should I do X orYwhereYis
the most highly valued alternative to X?” 2. Opportunity Cost includes time cost as well as money cost
1. you choose to go to a concert, which costs $50. your next best alternative is to work
for 2 hours and earn $40.
OC = $50 + $40 = $90
Remember: The opportunity cost of spending a $1 is $1 (since you could spend on other goods or
2. you choose to go to a concert, which costs $50, your next best alternative is to
go for a walk, which you value at $25.
Opportunity Cost = $50 + $25 = $75
1. in 2005, you purchased a bottle of rare wine for $50. in 2008, you could have sold the
wine for $200. today you could see the wine for $75.
If you drink the wine today, and the next best alternative is to sell it, what is the opportunity cost?
0 (you already paid for it)
(What you paid in 2005 or what you could have sold the wine for in 2008 are NOT relevant)
1. receive Free concert ticket (2 hours)
2. next best alternative
Dinner at favourtite rest