opportunity cost Flashcards
Define opportunity cost
Opportunity cost is the next best alternative foregone.
examples
The cost of war. If the government spends $870bn on a war, it is $870bn they cannot spend on education, health care or cutting taxes / reducing the budget deficit.
Spending on new roads. If the government build a new road, then that money can’t be used for alternative spending plans, such as education and healthcare.
Tax cuts. If the government offers an income tax cut, the opportunity cost is that government revenue cannot be used to finance some aspect of government spending.
Time. If you have 12 hours at your disposal during the day, you could spend these hours in work or leisure. The opportunity cost of spending all day watching TV is that you are not able to do any study during the day.
Enter the workforce at 16. If you enter the workforce at 16 without qualifications you start earning money straight away. But the opportunity cost is that you lose out on the potential of getting better qualifications and possibly a higher salary in the long-run.
what diagram is opportunity cost shown through?
production possibility frontier
what is the theory of comparative disadvantage
The theory of comparative advantage states that countries should specialise in producing goods where they have a lower opportunity cost.
what is a free good?
If there is no opportunity cost in consuming a good, we can term it a free good. For example, if you breathe air, it doesn’t reduce the amount available to other people – there is no opportunity cost.
