The opportunity cost is the next best choice forgone in a decision. Opportunity cost is not only measured in terms of money or materials, but also in terms of anything that has value to the decision maker. For example, opp. cost could be measured in money, happiness, or another event. Opportunity cost only applies to events that are mutually exclusive, events that cannot occur at the same time. Opportunity cost is a vital concept of economics and shows “the basic relationship between scarcity and choice”. The opportunity cost is very important to determining the true costs of any decision.
For example, the opportunity cost of going to a Bulls game is not doing your homework. Not doing your homework and going to a Bulls game are mutually exclusive events because they cannot occur at the same time, one of the events must be chosen. Doing homework was the next best choice forgone.
Type of Production Production Alternatives
A B C D E
Pizza 0 4 8 16 32
Pasta 30 28 22 12 0
If the economy is at point C, the Opportunity Cost of one more Pizza is:
8/10 = 1/x x=5/4
The following graph illustrates an increasing opportunity cost (as more of one item is made, increasing less of other is made):
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The following graph illustrates a constant opportunity cost:
The article above is titled “The Opportunity Cost of the Iraq War”. This article discusses the billions of U.S. dollars that have been spent on the Iraq war as of August 25, 2004. As of August 25, $144 billion have been spent on the war. This $144 billion is the opportunity cost of the war. The next best choice forgone was spending this money on other programs or items.
For example, the opportunity cost of going to a Bulls game is not doing your homework. Not doing your homework and going to a Bulls game are mutually exclusive events because they cannot occur at the same time, one of the events must be chosen. Doing homework was the next best choice forgone.
Type of Production Production Alternatives
A B C D E
Pizza 0 4 8 16 32
Pasta 30 28 22 12 0
If the economy is at point C, the Opportunity Cost of one more Pizza is:
8/10 = 1/x x=5/4
The following graph illustrates an increasing opportunity cost (as more of one item is made, increasing less of other is made):
The following graph illustrates a constant opportunity cost:
Article:
http://www.americanprogress.org/issues/2004/08/b171438.html
The article above is titled “The Opportunity Cost of the Iraq War”. This article discusses the billions of U.S. dollars that have been spent on the Iraq war as of August 25, 2004. As of August 25, $144 billion have been spent on the war. This $144 billion is the opportunity cost of the war. The next best choice forgone was spending this money on other programs or items.