ECO100 LEC1 9/12/2012 8:16:00 AM
Opportunity Cost and Marginal Analysis
Opportunity cost of an action is what are forgoes (gives up) by not
taking the best alternative action
(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
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
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
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
(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