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The concept of opportunity cost

Economists use the term opportunity cost    to indicate what must be given up to obtain something that is desired. The idea behind opportunity cost is that the cost of one item is the lost opportunity to do or consume something else; in short, opportunity cost is the value of the next best alternative. For Alphonso, the opportunity cost of a burger is the four bus tickets he would have to give up. He would decide whether or not to choose the burger depending on whether the value of the burger exceeds the value of the forgone alternative—in this case, bus tickets. Since people must choose, they inevitably face tradeoffs in which they have to give up things they desire to get other things they desire more.

View this website for an example of opportunity cost—paying someone else to wait in line for you.

A fundamental principle of economics is that every choice has an opportunity cost. If you sleep through your economics class (not recommended, by the way), the opportunity cost is the learning you miss from not attending class. If you spend your income on video games, you cannot spend it on movies. If you choose to marry one person, you give up the opportunity to marry anyone else. In short, opportunity cost is all around us and part of human existence.

The following Work It Out feature shows a step-by-step analysis of a budget constraint calculation. Read through it to understand another important concept—slope—that is further explained in the appendix The Use of Mathematics in Principles of Economics .

Understanding budget constraints

Budget constraints are easy to understand if you apply a little math. The appendix The Use of Mathematics in Principles of Economics explains all the math you are likely to need in this book. So if math is not your strength, you might want to take a look at the appendix.

Step 1: The equation for any budget constraint is:

Budget = P 1  × Q 1  + P 2 × Q 2

where P and Q are the price and quantity of items purchased and Budget is the amount of income one has to spend.

Step 2. Apply the budget constraint equation to the scenario. In Alphonso’s case, this works out to be:

Budget = P 1 × Q 1 + P 2 × Q 2 $10 budget = $2 per burger × quantity of burgers + $0.50 per bus ticket × quantity of bus tickets $10 = $2 × Q burgers  + $0.50 × Q bus tickets

Step 3. Using a little algebra, we can turn this into the familiar equation of a line:

y  =  b + mx

For Alphonso, this is:

$10  =  $2 × Q burgers  +  $0.50  ×  Q bus tickets

Step 4. Simplify the equation. Begin by multiplying both sides of the equation by 2:

2 × 10  =  2 × 2 × Q burgers  + 2 × 0.5 × Q bus tickets   20  =  4 × Q burgers  + 1 × Q bus tickets

Step 5. Subtract one bus ticket from both sides:

20 – Q bus tickets = 4 × Q burgers

Divide each side by 4 to yield the answer:

5 – 0.25 × Q bus tickets = Q burgers or Q burgers = 5 – 0.25 × Q bus tickets

Step 6. Notice that this equation fits the budget constraint in [link] . The vertical intercept is 5 and the slope is –0.25, just as the equation says. If you plug 20 bus tickets into the equation, you get 0 burgers. If you plug other numbers of bus tickets into the equation, you get the results shown in [link] , which are the points on Alphonso’s budget constraint.

Point Quantity of Burgers (at $2) Quantity of Bus Tickets (at 50 cents)
A 5 0
B 4 4
C 3 8
D 2 12
E 1 16
F 0 20

Step 7. Notice that the slope of a budget constraint always shows the opportunity cost of the good which is on the horizontal axis. For Alphonso, the slope is −0.25, indicating that for every four bus tickets he buys, Alphonso must give up 1 burger.

There are two important observations here. First, the algebraic sign of the slope is negative, which means that the only way to get more of one good is to give up some of the other. Second, the slope is defined as the price of bus tickets (whatever is on the horizontal axis in the graph) divided by the price of burgers (whatever is on the vertical axis), in this case $0.50/$2 = 0.25. So if you want to determine the opportunity cost quickly, just divide the two prices.

Questions & Answers

what is terms of trade
Ibrahim Reply
No question... This is nice
Gbenga Reply
hw can we solve problem of scarcity
scarcity is not necessarily a problem but a constant condition of the world. there are not enough resources to satisfy the unlimited wants.
why do compute GDP?
steven Reply
can anyone shortly determine the word inflation.
Ibrahim Reply
Continous increase in the general level of prices or in the cost of living.
persistent increased in general price level
all correct...
the father of economics
Reuben Reply
Adem smith
Adem smith
Adem smith sure
the father of economic regarding to adam Smith
the father of political of economic and capitalism in his book and inquary in to the wealth of the nation.
Adam Smith his the father of economic
different types of price elasticity of demand with the aid of graphs
Tshepo Reply
what about mean median and mode
Dike Reply
mode is the most occurred number and median is the middle digit
the mean is the sum of all the data divided by the number eg: 2+4+4+5+3+5+1 =24÷7
what is exchange rate
thanks guys
What is Equilibrium?
that when supply equals demand. that's where the supply curve and the demand curve intercept.
equilibrium is when the both side of the price is balanced
Thanks Asuquo Agwuu
what is paradox Of drift
doris Reply
it's thrift not drift
so what is it sir
what are the causes of unemployment
Afful Reply
lack of job in the rural areas
High level of illiteracy
Unfulfilled government promises
this one no be problem waii
low rate of industrialisation
elements of economic
Muhammad Reply
Supply demand consumer and money.
please would you explain further about short run and long run
Doris Reply
Can someone please tell about any social economic issue
Abdul Reply
what is economic growth
Enone Reply
Good morning. It is within a period of time that goods and services increase to become more efficient.
Economic growth is also the growth of income and it can take place under conditions of high unemployment and general poverty.......
I fink av answered your question
Can someone please tell me about any Social Economic issue ?
what is human capital formation
It deals with humans behavior
Can someone mention the types of unemployment
income inequality and poverty can be included as social economy
what is the relationship btn indifference curve and consumer utility maximization
what is the the law of diminishing marginal utility
pls one question at a time
the law of diminishing marginal utility states that , the more a commodity possessed les satisfaction is derived from it
structural unemployment, seasonal unemployment, disguised unemployment,
each indifference curve has its own level of satisfaction and for consumer utility maximization a budget line should be tangent to indeference curve.
let's discuss together guyz come on
can any one mention elements of economic
start it then
haw about human capital formation
Doris I don't understand about human capital formation, so how do u understand it?
please national income
national income means MKT value of all final goods en services in particular particular period of time usually a year
The transformation of raw human resource into highly productive human resource with these input. Human resource can be turned into human capital with effective input.
Muhammad, as in environmental sense ?
From my understanding I am currently taking up Econ 302 Principles of Economics. There's 3 that I know of. 1. Traditional 2. Command 3. Market
What is National incoming Accounting
Nicholas Reply
National income accounting is the aggregate data use to major the well being of an economic.
What's Bank?
A bank is A Financial institution that accepts the deposit from the public and lending this money to the public in the form of loans and advances
A bank is as well an institution that manages the flow of the currency
A bank is the place where banking activities is been carried out.
And a bank is where treasures goods are kept and must be insured.
banking and a Bank are two different things
banking is the act of accepting money as deposit, giving of loans, and keeping treasure bills for consumers
a bank is a financial institute that accepts deposit n give out loan
a bank is a place where transactions are taking place.

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Source:  OpenStax, Principles of economics. OpenStax CNX. Sep 19, 2014 Download for free at http://legacy.cnx.org/content/col11613/1.11
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