Opportunity cost

The cost of a choice includes the best option you lose. A cheap purchase can still use money or time needed for a more important goal.

Lesson 2 of 33 parts Practice Flashcards

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Opportunity cost and Trade-off

Objective: Explain opportunity cost and trade-off, distinguish their meanings, and apply them to a described case.

Opportunity cost: Opportunity cost is the next-best alternative forgone by a choice. Trade-off: A trade-off exchanges one valued outcome for another. Financial decisions use limited resources to serve priorities over different time horizons. Relevant costs include time, risk, and ongoing obligations as well as the advertised price. Needs depend on circumstances, and choosing one goal can delay another. A sound comparison states what service is being purchased, which alternatives are feasible, and what assumptions could change the conclusion. Application: Spending on entertainment delays the preferred alternative of buying supplies. This most directly illustrates opportunity cost. A cheaper commute takes more time. This most directly illustrates trade-off.

Worked examples

Try itOriginal teaching scenario: Spending on entertainment delays the preferred alternative of buying supplies. Which idea from this section does it most directly illustrate?Show answer

Step 1 — Read the observation: Spending on entertainment delays the preferred alternative of buying supplies. Step 2 — Recall the relevant idea: Opportunity cost is the next-best alternative forgone by a choice. Step 3 — Connect the observation to the idea: The scenario is an illustration of opportunity cost. Step 4 — Check the limit: This short scenario illustrates the concept; it does not establish every detail or exclude every other influence in a real situation.

Try itOriginal teaching scenario: A cheaper commute takes more time. Which idea from this section does it most directly illustrate?Show answer

Step 1 — Read the observation: A cheaper commute takes more time. Step 2 — Recall the relevant idea: A trade-off exchanges one valued outcome for another. Step 3 — Connect the observation to the idea: The scenario is an illustration of trade-off. Step 4 — Check the limit: This short scenario illustrates the concept; it does not establish every detail or exclude every other influence in a real situation.

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Opportunity cost and Trade-off

Objective: Explain opportunity cost and trade-off, distinguish their meanings, and apply them to a described case.

Worked examples

Try itOriginal teaching scenario: Spending on entertainment delays the preferred alternative of buying supplies. Which idea from this section does it most directly illustrate?Show answer

Try itOriginal teaching scenario: A cheaper commute takes more time. Which idea from this section does it most directly illustrate?Show answer

Time cost and Sunk cost

Objective: Explain time cost and sunk cost, distinguish their meanings, and apply them to a described case.

Time cost: Time cost is the opportunity cost of time used for an activity. Sunk cost: A sunk cost is past expenditure that the current choice cannot recover. Financial decisions use limited resources to serve priorities over different time horizons. Relevant costs include time, risk, and ongoing obligations as well as the advertised price. Needs depend on circumstances, and choosing one goal can delay another. A sound comparison states what service is being purchased, which alternatives are feasible, and what assumptions could change the conclusion. Application: Comparing offers takes time otherwise available for paid work. This most directly illustrates time cost. An unused nonrefundable ticket does not make future travel worthwhile by itself. This most directly illustrates sunk cost.

Worked examples

Try itOriginal teaching scenario: Comparing offers takes time otherwise available for paid work. Which idea from this section does it most directly illustrate?Show answer

Step 1 — Read the observation: Comparing offers takes time otherwise available for paid work. Step 2 — Recall the relevant idea: Time cost is the opportunity cost of time used for an activity. Step 3 — Connect the observation to the idea: The scenario is an illustration of time cost. Step 4 — Check the limit: This short scenario illustrates the concept; it does not establish every detail or exclude every other influence in a real situation.

Try itOriginal teaching scenario: An unused nonrefundable ticket does not make future travel worthwhile by itself. Which idea from this section does it most directly illustrate?Show answer

Step 1 — Read the observation: An unused nonrefundable ticket does not make future travel worthwhile by itself. Step 2 — Recall the relevant idea: A sunk cost is past expenditure that the current choice cannot recover. Step 3 — Connect the observation to the idea: The scenario is an illustration of sunk cost. Step 4 — Check the limit: This short scenario illustrates the concept; it does not establish every detail or exclude every other influence in a real situation.

Marginal decision and Delayed gratification

Objective: Explain marginal decision and delayed gratification, distinguish their meanings, and apply them to a described case.

Marginal decision: A marginal decision compares the additional benefits and costs of one more action. Delayed gratification: Delayed gratification postpones a current reward for a valued later outcome. Financial decisions use limited resources to serve priorities over different time horizons. Relevant costs include time, risk, and ongoing obligations as well as the advertised price. Needs depend on circumstances, and choosing one goal can delay another. A sound comparison states what service is being purchased, which alternatives are feasible, and what assumptions could change the conclusion. Application: A shopper considers whether an extra feature justifies its extra cost. This most directly illustrates marginal decision. A student waits to purchase until a savings goal is reached. This most directly illustrates delayed gratification.

Worked examples

Try itOriginal teaching scenario: A shopper considers whether an extra feature justifies its extra cost. Which idea from this section does it most directly illustrate?Show answer

Step 1 — Read the observation: A shopper considers whether an extra feature justifies its extra cost. Step 2 — Recall the relevant idea: A marginal decision compares the additional benefits and costs of one more action. Step 3 — Connect the observation to the idea: The scenario is an illustration of marginal decision. Step 4 — Check the limit: This short scenario illustrates the concept; it does not establish every detail or exclude every other influence in a real situation.

Try itOriginal teaching scenario: A student waits to purchase until a savings goal is reached. Which idea from this section does it most directly illustrate?Show answer

Step 1 — Read the observation: A student waits to purchase until a savings goal is reached. Step 2 — Recall the relevant idea: Delayed gratification postpones a current reward for a valued later outcome. Step 3 — Connect the observation to the idea: The scenario is an illustration of delayed gratification. Step 4 — Check the limit: This short scenario illustrates the concept; it does not establish every detail or exclude every other influence in a real situation.

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