Economics
Explainer
Opportunity Cost: The Price You Never See
Every choice you make has a hidden price tag called opportunity cost.
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Lesson notes
Key points
- Scarcity means resources like time, land and money are limited, so choosing one use means giving up others.
- Opportunity cost is the value of the next best alternative forgone, not the sum of all alternatives.
- If a hectare in Tarkwa can grow cocoa or be mined for gold, mining it costs the cocoa income forgone.
- So a full university year costs tuition plus the wages you could have earned working instead.
Definitions
- Scarcity
- Limited resources relative to unlimited wants, forcing choices between alternatives.
- Opportunity cost
- The value of the next best alternative given up when a choice is made.
Takeaway: Opportunity cost is the next best alternative you give up.
Quick check: Opportunity cost equals the value of…
- All alternatives given up
- The next best alternative
- The money you spend
ScarcityNext best alternativeLand use trade-offImplicit cost
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