Econ test chapter 1.3 (opportunity cost) Flashcards
(10 cards)
opportunity cost
the value of the next best alternative forgone when making a decision.
What does opportunity cost influence
It directly influences the decisions made by stakeholders (workers, producers, consumers)
Why is there opportunity cost
because of scarcity- There is competition for the economy’s resources, thus an opportunity cost when allocating them.
When do CONSUMERS face opportunity cost? (think of examples)
consumers have limited income, so whenever they purchase a good or service, they give up the opportunity to pursue other products.
When do WORKERS face opportunity cost? (think of examples)
By choosing to specialise in a particular profession, workers give up the opportunity to pursue other jobs and careers.
When do PRODUCERS face opportunity cost? (think of examples)
They need to choose between different business opportunities. And decide how best to allocate their resources
When does the GOVERNMENT face opportunity cost? (think of examples)
The government has to consider its expenditure of tax revenue on various things.
Economic goods vs Free goods
Resources are used to produce economic goods, thus they involve an opportunity cost
Free goods do not need resources to be produced and thus do not involve an opportunity cost.
What option will decision makers choose? (think of an example)
The option that gives them the best economic return.
A firm deciding on production may choose automation if it reduces costs and increases efficiency.
The opportunity cost for a farmer in terms of corn and wheat are:
Corn production (unit)
65 (-10)
55
Wheat production unit
30 (+5)
35
calculate the opportunity cost of producing one unit of wheat.
Opportunity cost of 1 unit of wheat= unit of corn lost/ unit of wheat gained.
10/5=2
2 units of corn
for ever 2 units of corn lost, 1 unit of wheat is gained. The opportunity cost is the loss of 2 units of corn.
