Opportunity Cost

Chapter 1.3

Warm-Up

In this clip from the movie, Along Came Polly, what does Reuben (Ben Stiller) lose by putting on and taking off his pillows every morning and evening?

Reading Quiz 1.3

1. Define Opportunity Cost

2. True or False: opportunity cost varies

3. What is sunk cost?

4. List one opportunity cost of going to college.

OPPORTUNITY COSTCLASS NOTES (RIGHT)

Opportunity Cost

• The Opportunity Cost of the chosen item or activity is the value of the best alternative you must pass up.

• We ALWAYS choose what we do or buy because it is the most preferable at the time.

• Simulation

Estimate Opportunity Cost

Opportunity cost is an estimate: we never really know the real value of next best alternative, only what is expected.

Opportunity Cost Varies

Opportunity cost depends on the value of the alternatives!

Do we REALLY calculate O.C.?

We estimate the opportunity cost based on rational self-interest. We don’t necessarily calculate value of all possible alternatives. Information may be limited/faulty

Decisions may lead to lost opportunities and regret

Time = Scarce

OR

Sunk Cost

Sunk Cost: a PAST cost that you have already acquired and cannot recover

Sunk costs must be ignored when making economic decisions

“No point in crying over spilled milk”