The Idea of Opportunity Cost

the principle of opportunity cost

the principle of opportunity cost

Each time you make a choice about how to use a limited resource, you are also sacrificing other options, Using the term opportunity cost, economists describe what must be sacrificed to attain a desired outcome.

The principle that every choice comes at some expense is an axiom of economics.

The opportunity cost is the learning you miss if you sleep through your economics class (not recommended, by the way). Spending your money on video games will prevent you from spending it on movies.

A person who chooses to marry one person forfeits the opportunity to marry anyone else. This is known as opportunity cost.

According to opportunity cost theory, the cost of one item is the lost opportunity to do or consume something else; in short, opportunity cost is the cost of the next best alternative.

People must make choices so they face trade-offs in which they must give up something they desire for something they desire more.

Opportunity Cost and Individual Decisions

Recognizing the opportunity cost can sometimes lead to a change in behavior.

Think about, for example, spending $8 every day at work on lunch.

Even if you know perfectly well that bringing a lunch from home would only cost $3 a day, buying lunch at the restaurant represents an opportunity cost of $5 (that is, the $8 it would cost to buy lunch minus the $3 it would cost if you brought it from home).

It does not seem that much to spend five dollars a day. In any case, if you add up how much that amounts to in a year –250 workdays per year times $5 per day equals $1,250 –that’s about the cost of a decent vacation.

You might make different choices if you perceived the opportunity cost as “a nice vacation” rather than “$5 a day.”.

Opportunity Cost and Societal Decisions

Opportunity Cost and Societal Decisions

Opportunity Cost and Societal Decisions

With societal decisions, opportunity costs also come into play.

A universal health care plan would be nice, however, it would have a lower opportunity cost in terms of housing, environmental protection, or national defense, The same applies to government policies.

Following the hijacking of terrorist planes on September 11, 2001, many proposals were made to improve the safety of air travel, such as the following:

  • “Sky marshals,” armed with automatic weapons, could operate inconspicuously among the passengers. Sky marshals would cost roughly $3 billion per year if they were on every flight.
  • To make it harder for terrorists to take over the plane, U.S. planes would have to be retrofitted with reinforced cockpit doors that would cost $450 million.
  • The cost of equipping airports with more sophisticated security devices, such as three-dimensional baggage scanners and cameras with facial recognition software, would increase by $2 billion.

Lost time can be a significant component of opportunity cost.

A more secure airline doesn’t cost as much money, however. What costs more is the added time spent waiting at the airport.

Over 800 million passengers took plane trips in the United States in 2012, according to the United States Department of Transportation.

After the 9/11 hijackings, security screenings have become more intensive, so the procedure is taking longer than it used to.

Per flight, air passengers spend an additional 30 minutes at the airport on average.

When converting an opportunity cost in time into a monetary value, economists place a value on time.

As most air travelers are businesspeople with high salaries, conservative estimates put the average “price of time” for air travelers at $20 per hour.

Accordingly, airport delays could cost as much as eight billion dollars each year if 800 million passengers are delayed by 0.5 hours per $20 hour.

There is no question that waiting time can have significant opportunity costs that are similar to costs associated with direct expenditures.

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