Opportunity Cost

Question 1

Opportunity Cost

Answer 1

Everyone has the same hours of a day, but everybody makes different decisions of how they spend their time and money. Everytime you make a choice, you place certain value on that choice - every choice has a value to you.

Question 2

What can opportunity cost be regarded as?

Answer 2

The opportunity cost of a choice is what you gave up to get it.

Question 3

Value: Benefits and Cost and what is the main idea of a good economic decision?

Answer 3

Value has two parts:

1. benefits
2. cost

The main idea of a good economic decision is to make the greatest benefit to us at the lowest cost.

Question 4

The Three Assumptions of the Economic Man

Answer 4

In Economics it is assumed that the economic man is

1. rational
2. utility maximising
3. individual decisions

Utility = benefit

Question 5

The Economic Way of Thinking

Answer 5

1. Economists provide special emphasis to the role of the opportunity costs in their analysis
2. Economists assume that individuals make choices that seek to maximize the value of some objective, and that they define their objectives in terms of their own self-interest.
3. Individuals maximize by deciding whether to do a little more or a little less of something. Individuals pay attention to the consequences of small changes in the levels of the activities they pursue.

Question 6

Individuals maximize in pursuing self-interest

Answer 6

Economists assume that individuals always chose the decision with the most utility/maximum value, within the constraints they face for their self-interest.

Question 7

Choices are made at the margin

Answer 7

Economists argue that most choices are made ‘at the margin’. The margin is the current level of an activity. A choice at the margin is a decision to do a little more or a little less of something.

Question 8

What is resource allocation?

Answer 8

Resource allocation involves making choices or decisions about how scarce natural, labour and capital inputs are to be used or distributed among competing areas of production. We must decide how to use our limited resources as efficiently as possible because relative scarcity means that we cannot have all the goods and services that we want. Given that we cannot have all things in unlimited quantities, individuals and nations are forced to make difficult choices between alternative or competing areas of production.

This leads to opportunity cost.

Question 9

What is opportunity cost?

Answer 9

Opportunity cost is the value of the best alternative forgone in making any choice. The possible benefits of a choice will shape our decision when it comes to choosing. When all available resources are fully and most efficiently used in production, a decision to produce more of one type of good or service means reduced production in some other area. This is required to free up scarce resources to produce more of the better product.

Question 10

How else can opportunity cost be measured?

Answer 10

Opportunity cost can be measured in other ways that are not monetary. eg. value to you in the future etc.