{"id":4691,"date":"2017-07-01T02:46:54","date_gmt":"2017-07-01T02:46:54","guid":{"rendered":"https:\/\/courses.lumenlearning.com\/wm-macroeconomics\/chapter\/reading-the-concept-of-opportunity-cost\/"},"modified":"2018-05-04T13:36:29","modified_gmt":"2018-05-04T13:36:29","slug":"reading-the-concept-of-opportunity-cost","status":"publish","type":"chapter","link":"https:\/\/courses.lumenlearning.com\/oldwestbury-wm-macroeconomics\/chapter\/reading-the-concept-of-opportunity-cost\/","title":{"raw":"The Concept of Opportunity Cost","rendered":"The Concept of Opportunity Cost"},"content":{"raw":"<div class=\"textbox learning-objectives\">\r\n<h3>Learning Objectives<\/h3>\r\n<ul>\r\n \t<li>Describe opportunity cost and its importance in decision-making<\/li>\r\n<\/ul>\r\n<\/div>\r\n\r\n[caption id=\"attachment_5175\" align=\"aligncenter\" width=\"498\"]<a href=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images-archive-read-only\/wp-content\/uploads\/sites\/1511\/2016\/05\/10211550\/5355424756_c50d1db307_b.jpg\" rel=\"attachment wp-att-5175\"><img class=\"wp-image-5175\" src=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images\/wp-content\/uploads\/sites\/2043\/2017\/07\/01024650\/5355424756_c50d1db307_b-1024x683.jpg\" alt=\"Photo of two doors, one painted bright blue, the other painted red.\" width=\"498\" height=\"332\" \/><\/a> <strong>Figure 1.<\/strong> What is the opportunity cost of choosing the blue door?[\/caption]\r\n<h2>The Idea of Opportunity Cost<\/h2>\r\nSince resources are limited, every time you make a choice about how to use them, you are also choosing to forego other options. Economists use the term <strong>opportunity cost<\/strong> to indicate what must be given up to obtain something that's desired. 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. 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.\r\n\r\nThe 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.\r\n\r\nSince people must choose, they inevitably face trade-offs in which they have to give up things they desire to get other things they desire more.\r\n<h2>Opportunity Cost and Individual Decisions<\/h2>\r\nIn some cases, recognizing\u00a0the opportunity cost can alter personal behavior. Imagine, for example, that you spend $8 on lunch every day at work. You may know perfectly well that bringing a lunch from home would cost only $3 a day, so the opportunity cost of buying lunch at the restaurant is $5 each day (that is, the $8 that buying lunch costs minus the $3 your lunch from home would cost). Five dollars each day does not seem to be that much. However, if you project what that adds up to in a year\u2014250 workdays a year \u00d7 $5 per day equals $1,250\u2014it's the cost, perhaps, of a decent vacation. If the opportunity cost were described as \"a nice vacation\" instead of \"$5 a day,\" you might make different choices.\r\n<div class=\"textbox tryit\">\r\n<h3>Try It<\/h3>\r\nhttps:\/\/assessments.lumenlearning.com\/assessments\/7068\r\n\r\n<\/div>\r\n<h2 class=\"linkitup\">Opportunity Cost and\u00a0Societal Decisions<\/h2>\r\n<div class=\"linkitup\">\r\n\r\nOpportunity cost also comes into play with societal decisions. Universal health care would be nice, but the opportunity cost of such a decision would be less housing, environmental protection, or national defense. These trade-offs also arise\u00a0with government policies. For example, after the terrorist plane hijackings on September 11, 2001, many proposals, such as the following,\u00a0were made\u00a0to improve air travel safety:\r\n<ul>\r\n \t<li>The federal government could\u00a0provide armed \"sky marshals\" who would travel inconspicuously with the rest of the passengers.\u00a0The cost of having a sky marshal on every flight would be roughly $3 billion per year.<\/li>\r\n \t<li>Retrofitting all U.S. planes with reinforced cockpit doors to make it harder for terrorists to take over the plane would have a price tag of $450 million.<\/li>\r\n \t<li>Buying more sophisticated security equipment for airports, like three-dimensional baggage scanners and cameras linked to face-recognition software, would\u00a0cost another $2 billion.<\/li>\r\n<\/ul>\r\n<\/div>\r\n\r\n[caption id=\"attachment_10243\" align=\"alignright\" width=\"300\"]<a href=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images\/wp-content\/uploads\/sites\/2043\/2017\/07\/23230526\/hourglass-620397_1920.jpg\"><img class=\"wp-image-10243 size-medium\" src=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images\/wp-content\/uploads\/sites\/2043\/2017\/07\/23230526\/hourglass-620397_1920-300x226.jpg\" alt=\"Hour glass with red sand.\" width=\"300\" height=\"226\" \/><\/a> <strong>Figure 2. Time and Money.<\/strong> Lost time can be a significant component of opportunity cost.[\/caption]\r\n\r\nHowever, the single biggest cost of greater airline security doesn't\u00a0involve money. It's the opportunity cost of additional waiting time at the airport. According to the United States Department of Transportation, more than 800 million passengers took plane trips in the United States in 2012. Since the 9\/11 hijackings, security screening has become more intensive, and consequently, the procedure takes longer than in the past. Say that, on average, each air passenger spends an extra 30 minutes in the airport per trip. Economists commonly place a value on time to convert an opportunity cost in time into a monetary figure. Because many air travelers are relatively\u00a0highly paid businesspeople, conservative estimates set the average \"price of time\" for air travelers at $20 per hour. Accordingly, the opportunity cost of delays in airports could be as much as 800 million (passengers) \u00d7 0.5 hours \u00d7 $20\/hour\u2014or, $8 billion per year. Clearly, the opportunity costs of waiting time can be just as substantial\u00a0as costs involving direct spending.\r\n<div class=\"textbox tryit\">\r\n<h3>Try It<\/h3>\r\nhttps:\/\/assessments.lumenlearning.com\/assessments\/7069\r\n\r\n<\/div>\r\n<div class=\"textbox examples\">\r\n<h3>Watch It: Opportunity Cost<\/h3>\r\nWatch this video to see some more examples and a deeper explanation of opportunity cost.\r\n\r\n<iframe src=\"https:\/\/www.youtube.com\/embed\/PSU-_n81QT0?rel=0\" width=\"853\" height=\"480\" frameborder=\"0\"><\/iframe>\r\n\r\n<\/div>\r\n<div class=\"textbox learning-objectives\">\r\n<h3>Glossary<\/h3>\r\n[glossary-page][glossary-term]opportunity cost: [\/glossary-term]\r\n[glossary-definition]the value of the next best alternative[\/glossary-definition]\r\n[\/glossary-page]\r\n\r\n<\/div>","rendered":"<div class=\"textbox learning-objectives\">\n<h3>Learning Objectives<\/h3>\n<ul>\n<li>Describe opportunity cost and its importance in decision-making<\/li>\n<\/ul>\n<\/div>\n<div id=\"attachment_5175\" style=\"width: 508px\" class=\"wp-caption aligncenter\"><a href=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images-archive-read-only\/wp-content\/uploads\/sites\/1511\/2016\/05\/10211550\/5355424756_c50d1db307_b.jpg\" rel=\"attachment wp-att-5175\"><img loading=\"lazy\" decoding=\"async\" aria-describedby=\"caption-attachment-5175\" class=\"wp-image-5175\" src=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images\/wp-content\/uploads\/sites\/2043\/2017\/07\/01024650\/5355424756_c50d1db307_b-1024x683.jpg\" alt=\"Photo of two doors, one painted bright blue, the other painted red.\" width=\"498\" height=\"332\" \/><\/a><\/p>\n<p id=\"caption-attachment-5175\" class=\"wp-caption-text\"><strong>Figure 1.<\/strong> What is the opportunity cost of choosing the blue door?<\/p>\n<\/div>\n<h2>The Idea of Opportunity Cost<\/h2>\n<p>Since resources are limited, every time you make a choice about how to use them, you are also choosing to forego other options. Economists use the term <strong>opportunity cost<\/strong> to indicate what must be given up to obtain something that&#8217;s desired. 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. 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.<\/p>\n<p>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.<\/p>\n<p>Since people must choose, they inevitably face trade-offs in which they have to give up things they desire to get other things they desire more.<\/p>\n<h2>Opportunity Cost and Individual Decisions<\/h2>\n<p>In some cases, recognizing\u00a0the opportunity cost can alter personal behavior. Imagine, for example, that you spend $8 on lunch every day at work. You may know perfectly well that bringing a lunch from home would cost only $3 a day, so the opportunity cost of buying lunch at the restaurant is $5 each day (that is, the $8 that buying lunch costs minus the $3 your lunch from home would cost). Five dollars each day does not seem to be that much. However, if you project what that adds up to in a year\u2014250 workdays a year \u00d7 $5 per day equals $1,250\u2014it&#8217;s the cost, perhaps, of a decent vacation. If the opportunity cost were described as &#8220;a nice vacation&#8221; instead of &#8220;$5 a day,&#8221; you might make different choices.<\/p>\n<div class=\"textbox tryit\">\n<h3>Try It<\/h3>\n<p>\t<iframe id=\"lumen_assessment_7068\" class=\"resizable\" src=\"https:\/\/assessments.lumenlearning.com\/assessments\/load?assessment_id=7068&#38;embed=1&#38;external_user_id=&#38;external_context_id=&#38;iframe_resize_id=lumen_assessment_7068\" frameborder=\"0\" style=\"border:none;width:100%;height:100%;min-height:400px;\"><br \/>\n\t<\/iframe><\/p>\n<\/div>\n<h2 class=\"linkitup\">Opportunity Cost and\u00a0Societal Decisions<\/h2>\n<div class=\"linkitup\">\n<p>Opportunity cost also comes into play with societal decisions. Universal health care would be nice, but the opportunity cost of such a decision would be less housing, environmental protection, or national defense. These trade-offs also arise\u00a0with government policies. For example, after the terrorist plane hijackings on September 11, 2001, many proposals, such as the following,\u00a0were made\u00a0to improve air travel safety:<\/p>\n<ul>\n<li>The federal government could\u00a0provide armed &#8220;sky marshals&#8221; who would travel inconspicuously with the rest of the passengers.\u00a0The cost of having a sky marshal on every flight would be roughly $3 billion per year.<\/li>\n<li>Retrofitting all U.S. planes with reinforced cockpit doors to make it harder for terrorists to take over the plane would have a price tag of $450 million.<\/li>\n<li>Buying more sophisticated security equipment for airports, like three-dimensional baggage scanners and cameras linked to face-recognition software, would\u00a0cost another $2 billion.<\/li>\n<\/ul>\n<\/div>\n<div id=\"attachment_10243\" style=\"width: 310px\" class=\"wp-caption alignright\"><a href=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images\/wp-content\/uploads\/sites\/2043\/2017\/07\/23230526\/hourglass-620397_1920.jpg\"><img loading=\"lazy\" decoding=\"async\" aria-describedby=\"caption-attachment-10243\" class=\"wp-image-10243 size-medium\" src=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images\/wp-content\/uploads\/sites\/2043\/2017\/07\/23230526\/hourglass-620397_1920-300x226.jpg\" alt=\"Hour glass with red sand.\" width=\"300\" height=\"226\" \/><\/a><\/p>\n<p id=\"caption-attachment-10243\" class=\"wp-caption-text\"><strong>Figure 2. Time and Money.<\/strong> Lost time can be a significant component of opportunity cost.<\/p>\n<\/div>\n<p>However, the single biggest cost of greater airline security doesn&#8217;t\u00a0involve money. It&#8217;s the opportunity cost of additional waiting time at the airport. According to the United States Department of Transportation, more than 800 million passengers took plane trips in the United States in 2012. Since the 9\/11 hijackings, security screening has become more intensive, and consequently, the procedure takes longer than in the past. Say that, on average, each air passenger spends an extra 30 minutes in the airport per trip. Economists commonly place a value on time to convert an opportunity cost in time into a monetary figure. Because many air travelers are relatively\u00a0highly paid businesspeople, conservative estimates set the average &#8220;price of time&#8221; for air travelers at $20 per hour. Accordingly, the opportunity cost of delays in airports could be as much as 800 million (passengers) \u00d7 0.5 hours \u00d7 $20\/hour\u2014or, $8 billion per year. Clearly, the opportunity costs of waiting time can be just as substantial\u00a0as costs involving direct spending.<\/p>\n<div class=\"textbox tryit\">\n<h3>Try It<\/h3>\n<p>\t<iframe id=\"lumen_assessment_7069\" class=\"resizable\" src=\"https:\/\/assessments.lumenlearning.com\/assessments\/load?assessment_id=7069&#38;embed=1&#38;external_user_id=&#38;external_context_id=&#38;iframe_resize_id=lumen_assessment_7069\" frameborder=\"0\" style=\"border:none;width:100%;height:100%;min-height:400px;\"><br \/>\n\t<\/iframe><\/p>\n<\/div>\n<div class=\"textbox examples\">\n<h3>Watch It: Opportunity Cost<\/h3>\n<p>Watch this video to see some more examples and a deeper explanation of opportunity cost.<\/p>\n<p><iframe loading=\"lazy\" src=\"https:\/\/www.youtube.com\/embed\/PSU-_n81QT0?rel=0\" width=\"853\" height=\"480\" frameborder=\"0\"><\/iframe><\/p>\n<\/div>\n<div class=\"textbox learning-objectives\">\n<h3>Glossary<\/h3>\n<div class=\"titlepage\">\n<dl>\n<dt>opportunity cost: <\/dt>\n<dd>the value of the next best alternative<\/dd>\n<\/dl>\n<\/div>\n<\/div>\n\n\t\t\t <section class=\"citations-section\" role=\"contentinfo\">\n\t\t\t <h3>Candela Citations<\/h3>\n\t\t\t\t\t <div>\n\t\t\t\t\t\t <div id=\"citation-list-4691\">\n\t\t\t\t\t\t\t <div class=\"licensing\"><div class=\"license-attribution-dropdown-subheading\">CC licensed content, Original<\/div><ul class=\"citation-list\"><li>Revision and adaptation. <strong>Provided by<\/strong>: Lumen Learning. <strong>License<\/strong>: <em><a target=\"_blank\" rel=\"license\" href=\"https:\/\/creativecommons.org\/licenses\/by\/4.0\/\">CC BY: Attribution<\/a><\/em><\/li><\/ul><div class=\"license-attribution-dropdown-subheading\">CC licensed content, Shared previously<\/div><ul class=\"citation-list\"><li>How Individuals Make Choices Based on Their Budget Constraint. <strong>Authored by<\/strong>: OpenStax College. <strong>Located at<\/strong>: <a target=\"_blank\" href=\"https:\/\/cnx.org\/contents\/vEmOH-_p@4.44:t8ejHQax@9\/How-Individuals-Make-Choices-B\">https:\/\/cnx.org\/contents\/vEmOH-_p@4.44:t8ejHQax@9\/How-Individuals-Make-Choices-B<\/a>. <strong>License<\/strong>: <em><a target=\"_blank\" rel=\"license\" href=\"https:\/\/creativecommons.org\/licenses\/by\/4.0\/\">CC BY: Attribution<\/a><\/em>. <strong>License Terms<\/strong>: Download for free at http:\/\/cnx.org\/contents\/bc498e1f-efe9-43a0-8dea-d3569ad09a82@4.44<\/li><li>hourglass. <strong>Authored by<\/strong>: Nile. <strong>Provided by<\/strong>: Pixabay. <strong>Located at<\/strong>: <a target=\"_blank\" href=\"https:\/\/pixabay.com\/en\/hourglass-time-hours-sand-clock-620397\/\">https:\/\/pixabay.com\/en\/hourglass-time-hours-sand-clock-620397\/<\/a>. <strong>License<\/strong>: <em><a target=\"_blank\" rel=\"license\" href=\"https:\/\/creativecommons.org\/about\/cc0\">CC0: No Rights Reserved<\/a><\/em><\/li><li>Zwei Tu00fcren \/ Two Doors. <strong>Authored by<\/strong>: Stefan W. <strong>Located at<\/strong>: <a target=\"_blank\" href=\"https:\/\/www.flickr.com\/photos\/stefan-w\/5355424756\/\">https:\/\/www.flickr.com\/photos\/stefan-w\/5355424756\/<\/a>. <strong>License<\/strong>: <em><a target=\"_blank\" rel=\"license\" href=\"https:\/\/creativecommons.org\/licenses\/by\/4.0\/\">CC BY: Attribution<\/a><\/em><\/li><li>Episode 8: Opportunity Costs. <strong>Authored by<\/strong>: Dr. Mary J. McGlasson. <strong>Located at<\/strong>: <a target=\"_blank\" href=\"https:\/\/www.youtube.com\/watch?v=PSU-_n81QT0&#038;feature=youtu.be\">https:\/\/www.youtube.com\/watch?v=PSU-_n81QT0&#038;feature=youtu.be<\/a>. <strong>License<\/strong>: <em><a target=\"_blank\" rel=\"license\" href=\"https:\/\/creativecommons.org\/licenses\/by-nc-sa\/4.0\/\">CC BY-NC-SA: Attribution-NonCommercial-ShareAlike<\/a><\/em><\/li><\/ul><\/div>\n\t\t\t\t\t\t <\/div>\n\t\t\t\t\t <\/div>\n\t\t\t <\/section>","protected":false},"author":29,"menu_order":4,"template":"","meta":{"_candela_citation":"[{\"type\":\"cc\",\"description\":\"How Individuals Make Choices Based on Their Budget Constraint\",\"author\":\"OpenStax College\",\"organization\":\"\",\"url\":\"https:\/\/cnx.org\/contents\/vEmOH-_p@4.44:t8ejHQax@9\/How-Individuals-Make-Choices-B\",\"project\":\"\",\"license\":\"cc-by\",\"license_terms\":\"Download for free at http:\/\/cnx.org\/contents\/bc498e1f-efe9-43a0-8dea-d3569ad09a82@4.44\"},{\"type\":\"original\",\"description\":\"Revision and adaptation\",\"author\":\"\",\"organization\":\"Lumen Learning\",\"url\":\"\",\"project\":\"\",\"license\":\"cc-by\",\"license_terms\":\"\"},{\"type\":\"cc\",\"description\":\"hourglass\",\"author\":\"Nile\",\"organization\":\"Pixabay\",\"url\":\"https:\/\/pixabay.com\/en\/hourglass-time-hours-sand-clock-620397\/\",\"project\":\"\",\"license\":\"cc0\",\"license_terms\":\"\"},{\"type\":\"cc\",\"description\":\"Zwei Tu00fcren \/ Two Doors\",\"author\":\"Stefan W\",\"organization\":\"\",\"url\":\"https:\/\/www.flickr.com\/photos\/stefan-w\/5355424756\/\",\"project\":\"\",\"license\":\"cc-by\",\"license_terms\":\"\"},{\"type\":\"cc\",\"description\":\"Episode 8: Opportunity Costs\",\"author\":\"Dr. Mary J. McGlasson\",\"organization\":\"\",\"url\":\"https:\/\/www.youtube.com\/watch?v=PSU-_n81QT0&feature=youtu.be\",\"project\":\"\",\"license\":\"cc-by-nc-sa\",\"license_terms\":\"\"}]","CANDELA_OUTCOMES_GUID":"d96352df-d41c-457d-b56b-abb81886eb06, 24e1fabc-3b21-446d-a886-afd883695ddf","pb_show_title":"on","pb_short_title":"","pb_subtitle":"","pb_authors":[],"pb_section_license":""},"chapter-type":[],"contributor":[],"license":[],"class_list":["post-4691","chapter","type-chapter","status-publish","hentry"],"part":4681,"_links":{"self":[{"href":"https:\/\/courses.lumenlearning.com\/oldwestbury-wm-macroeconomics\/wp-json\/pressbooks\/v2\/chapters\/4691","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/courses.lumenlearning.com\/oldwestbury-wm-macroeconomics\/wp-json\/pressbooks\/v2\/chapters"}],"about":[{"href":"https:\/\/courses.lumenlearning.com\/oldwestbury-wm-macroeconomics\/wp-json\/wp\/v2\/types\/chapter"}],"author":[{"embeddable":true,"href":"https:\/\/courses.lumenlearning.com\/oldwestbury-wm-macroeconomics\/wp-json\/wp\/v2\/users\/29"}],"version-history":[{"count":22,"href":"https:\/\/courses.lumenlearning.com\/oldwestbury-wm-macroeconomics\/wp-json\/pressbooks\/v2\/chapters\/4691\/revisions"}],"predecessor-version":[{"id":10711,"href":"https:\/\/courses.lumenlearning.com\/oldwestbury-wm-macroeconomics\/wp-json\/pressbooks\/v2\/chapters\/4691\/revisions\/10711"}],"part":[{"href":"https:\/\/courses.lumenlearning.com\/oldwestbury-wm-macroeconomics\/wp-json\/pressbooks\/v2\/parts\/4681"}],"metadata":[{"href":"https:\/\/courses.lumenlearning.com\/oldwestbury-wm-macroeconomics\/wp-json\/pressbooks\/v2\/chapters\/4691\/metadata\/"}],"wp:attachment":[{"href":"https:\/\/courses.lumenlearning.com\/oldwestbury-wm-macroeconomics\/wp-json\/wp\/v2\/media?parent=4691"}],"wp:term":[{"taxonomy":"chapter-type","embeddable":true,"href":"https:\/\/courses.lumenlearning.com\/oldwestbury-wm-macroeconomics\/wp-json\/pressbooks\/v2\/chapter-type?post=4691"},{"taxonomy":"contributor","embeddable":true,"href":"https:\/\/courses.lumenlearning.com\/oldwestbury-wm-macroeconomics\/wp-json\/wp\/v2\/contributor?post=4691"},{"taxonomy":"license","embeddable":true,"href":"https:\/\/courses.lumenlearning.com\/oldwestbury-wm-macroeconomics\/wp-json\/wp\/v2\/license?post=4691"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}