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ECO101H1 (575)


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University of Toronto St. George
James Pesando

ECO100 LEC1 9/12/2012 8:16:00 AM Opportunity Cost and Marginal Analysis Opportunity cost Opportunity cost of an action is what are forgoes (gives up) by not taking the best alternative action Insights (1) The question “ should I do X?” should be replaced by “should I do X or Y where Y is the most highly valued alternative to X?” (2) opportunity cost includes time lost as well as money cost Basic Examples 1. you go to concert, which costs $40. Your best alternative is to work for 2 hours and earn $40. Opportunity cost =$40+$50=$90 *the opportunity cost of spending $1 is $1 (since you could have better choice) the benefit does not affect opportunity cost. Opportunity cost would not change. However, if the benefit is less than $50, you could never attend the concert. 2. you choose to go to a concert, which costs $50. Your best alternative is to go for a walk, you value at $25. Opportunity cost is =$50+$25=$75 Difficult Examples 1. In 2005, you bought a bottle of wine for $50 In 2008, you could have sold it for $200 Today, you could sell the wine for $75 You drink the wine today, you best alternative is to sell it. What is the opportunity cost? Opportunity cost=$75 (what you paid in 2005 and what you sold in 2008 are not relevant) 3. you received a free concert ticket (2 hours). Your best alternative is to have a dinner at a restaurant, which you value at $100. The cost of the meal at the restaurant is $75. What is the opportunity cost if you choose to go to the concert? Opportunity cost is $25 $100 money value-$75 cost=$25 Measuring op
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