Definition of 'Opportunity Cost'

The cost of an alternative that must be forgone in order to pursue a certain

action. Put another way, the benefits you could have received by taking an
alternative action.
The difference in return between a chosen investment and one that is
necessarily passed up. Say you invest in a stock and it returns a paltry 2%
over the year. In placing your money in the stock, you gave up the
opportunity of another investment - say, a risk-free government bond
yielding 6%. In this situation, your opportunity costs are 4% (6% - 2%).

The opportunity cost of going to college is the money you would have
earned if you worked instead. On the one hand, you lose four years of salary
while getting your degree; on the other hand, you hope to earn more during
your career, thanks to your education, to offset the lost wages.
Here's another example: if a gardener decides to grow carrots, his or her
opportunity cost is the alternative crop that might have been grown instead
(potatoes, tomatoes, pumpkins, etc.).
In both cases, a choice between two options must be made. It would be an
easy decision if you knew the end outcome; however, the risk that you could
achieve greater "benefits" (be they Opportunity Cost
You are now in a position where you have had to make decisions. In doing so, there
will inevitably be some sacrifice to be made. The sacrifice is, for example, in
deciding that cancer treatment is more important than fertility treatment. You are
making judgments; these judgments cannot always be quantified to any great
degree.
Economists call these sacrifices Opportunity Cost. Opportunity Cost is central to
any understanding of economics; if you understand and can apply this concept you
are on the way to thinking like an economist - this will be very important as you go
through the course!
Economists illustrate the concept through the use of Production Possibility Curves
(PPCs). Look at the diagram below.

The diagram shows the possibilities for a hospital in the provision of two treatments
- one for cancer treatment and one for fertility treatment. The economy can only
build one clinic using it maximum resources. If all resources were devoted to
fertility treatment then Fo patients could be treated but the consequences of this
would be that there would be no funds available for cancer patients. Conversely, if
all resources were devoted to cancer treatment, Co patients would get treated but,
as in the first case, there would now be no funds available for patients seeking
fertility treatment.
Homework
Read the text below, and then answer the questions

Image: Should more money be spent

on funding more operations, or
should it go on training and
employing more Doctors?
The problems facing the National
Health Service (NHS) have been
huge: under-investment, poor pay,
and inability to recruit and retain
the right staff, endless competing
demands on resources, the
developments in technology and
treatment
and numerous crises has all contributed to the problem. Solving it is not going to
be quick or easy but does highlight the central issue in economics - that of
resource allocation and choice.

The Minister has raised taxes (primarily through raising National Insurance) to pay
for massive investment in the NHS. The NHS budget for 2005-6 is $76.38 billion,
which accounts for 18% of total government spending. Despite these massive
funds, problems still exist: waiting times for operations are very long; recruitment
of new staff - especially doctors and specialist nursing staff - takes time. The
government therefore has to convince voters that this extra spending will
eventually lead to an improvement in the service. Many in the UK would be willing
to pay higher taxes if it could be proved that the extra spending would lead to a
better service. However, the evidence is not so clear. Suggestions therefore have
been made about alternative methods of funding the NHS.
One such system is a social insurance fund. With this system, employers and
employees would have to pay a contribution from their salary into one of a number
of competing schemes. Such schemes would be dedicated to providing the best
possible use of funds for health care. The problem with such schemes is that it
would increase business costs - possibly reducing employment!
Another system could involve greater use of private health policies. Responsibility
for this would be in the hands of the individual to ensure they had enough
insurance cover to pay for any medical bills and treatment. This type of system is
more common in the USA but there are many who criticize such a system. It
invariably means some people who need the treatment cannot afford to pay health
insurance; others may gamble about not needing it only to find themselves landed
with huge debts if they do need treatment!
The problem in the UK, however, is quite different to that in a country such as
Tanzania in Africa. Tanzania is a poor country: it has a population of 35 million and
has a national income of around $5.5 billion per year! The poor healthcare facilities
have a significant impact on its ability to create wealth to improve its situation.
Lack of preventative medicine means more people get sick from diseases such as
malaria, typhoid and so on. This means they are unable to work, which means they
do not earn enough money and so the government has a lack of funds through
taxes to invest in the health service, which means... you get the picture! In
Tanzania, significant effects can be observed through very simple treatments rehydration salts, anti-malaria netting and so on - which could, if the government of
Tanzania had the funds, make a huge difference to the lives of the people and to
the general health and wealth creation capacities of the population. The text above
is typical of the sort of article available in newspapers and magazines such as 'The
Economist', 'Newsweek' and so on. You will gain a great deal from reading all
manner of relevant articles in your studies - but the secret is to read it like an
economist!!
Task: When reading the text, try to identify the following and where they occur:

How does the text relate to the three key questions that are at the heart of the
'economic problem'?

What are the opportunity costs involved in deciding on appropriate levels of

health care?

How does the text suggest that there may be alternative answers to the issue
of the provision of health in the UK?

Interdependence and the gains from

Trade Warm up
You have a roommate, your roommate is a good cook, and you are good at
cleaning. What would be more convenient? You cook and he cleans, or both do
parts of the cleaning and cooking and each one of you does what he is good at.
Class discussion

Explanation:
In every days life we rely on people to provide us with goods and services. Some of
these people are not even in the same country (you can book a hotel room in the
states, or buy a suit on line from Italy). This is what is known as interdependence
(people depend on each other when they exchange goods and services), the
benefit of interdependence is vast but we will be discussing a few of those benefits,
but first we need to answer a simple question: Why do people help each other?
People help each other for many reasons but the most apparent one is to gain
something in return. In the case of countries, trade provides each country with
products they lack in exchange for products they are rich at.
Benefits of interdependence and trade:
1. Interdependence promotes specialization which in turn allows producers to
focus on what they are rich which or good at.
2. Interdependence and Trade are desirable because they allow everyone to enjoy
a greater quantity and variety of goods and services.
3. Trade makes everyone better off because it allows specialization in activities
with a comparative advantage.

monetary or otherwise) with another option is the opportunity cost.