Microeconomics: Principles, Applications, and Tools (8th Edition)

Published by Prentice Hall
ISBN 10: 0-13294-886-9
ISBN 13: 978-0-13294-886-9

Chapter 2 - The Key Principles of Economics - Exercises - 2.1 The Principle of Opportunity Cost: 1.1

Answer

Opportunity cost is the value forgone when we choose a less beneficial alternative from various mutually exclusive alternatives. When we assume that we have made the best choice but still believe that the second best alternative would have brought better value, utility or enjoyment, the cost incurred is called opportunity cost.

Work Step by Step

One of the most important micro economic principles, the term opportunity cost was first used by Austrian economist Friedrich von Wieser. It is used in decisions to be made on life style choices, time management, production costs, factor allocation etc. Let us understand it through some examples. i)Suppose on your Birthday your father asks you to choose between a bike or a laptop. You choose a bike. The opportunity cost in this scenario is the benefit lost through the loss of various needs that a laptop is capable of fulfilling. ii)Suppose you have $150,000 and you have two alternatives, whether to invest the money in abc stocks or in mutual funds, You choose mutual funds for a risk free return but you lose the return if you would have invested the amount in abc stock which brought greater returns to its investors.
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