Opportunity Cost Essay

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 OPPORTUNITY COST It is the highest-valued option forgone. →highest-valued = the best alternative 1. Choice In reality, resources are scarce. Economic goods are not sufficient to satisfy all our wants. Thus, we need to make choice. There are always some options for us to choose from. For example, we can choose to eat an apple, an orange, or even ice-cream after dinner. Say, we choose to eat apple after dinner. If there is no apple, then we will eat orange instead. In this sense, “eating an apple” is our first choice, while “eating an orange” is our second choice and “eating ice-cream” is our third choice. In the case, we found that when we are obtaining an apple, we have to forgive to eat orange and ice-cream. Notice that when we are making a decision, we would only consider the value of the first choice and the second choice. Ref. to: we choose to eat apple after dinner. If there is no apple, then we will eat orange instead. Therefore, if we have chosen the first choice, the opportunity cost is forgiving the value of the second choice. As eating apple is our first choice, this action gives us the highest value. The highest valued option that we have to forgo is eating orange. We can conclude that the opportunity cost of eating apple is the value of eating orange (but not eating ice-cream!!!!). **** “value” does not only mean money price, but also non-pecuniary value. (i.e. full cost) 2. Application of opportunity cost As mentioned above, we only consider the value among the first choice and the second choice. Assumed that we are rational, if the value of eating orange (the second choice) rises to the level that higher than the value of eating apple (the original first choice), then our behavior will change. →recall: cost is the highest valued option forgone. ****Our behavior change

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