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Define Opportunity Cost, and Explain Its Importance in Economics

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Define Opportunity Cost, and Explain Its Importance in Economics

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  • July 2012
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As one of the four principles of individual decision making, in the process of choosing one option, item, good, or service over another, opportunity cost is the value of what is foregone in order to have the alternative option. More simply, the opportunity cost of an item is the benefits you could have received by taking an alternative action. Every decision that involves a choice between two or more options has an opportunity cost. Opportunity costs are not limited to fiscal or monetary costs, the value or opportunity not chosen can take many forms including lost time, foregone satisfaction, pleasure, or any other benefit that provides some sort of value. These can all be categorized as opportunity costs.

An example of opportunity costs would be my own decision to pursue a part time degree at Athabasca University. As a result of this decision to pursue further education I have to forego personal time and pleasure activities in order to study and I have to forego monetary earnings when I have to take time off work to complete course exams. These are examples of some of the opportunity costs of my decision to pursue a degree.

Opportunity cost is an important economic principle that affects how individuals and businesses make decisions each day. It is important because, we continually face tradeoffs and opportunity costs can determines what we do, the decisions we make and how we live and it helps make responsible suggestions for the allocation of scarce resources in the economy.