CHOICE AND OPPORTUNITY COST

LEARNING OUTCOMES
1. Define choice and opportunity cost
2. Identify the importance of studying choice and
opportunity cost
3. To understand the role of choice and opportunity cost
in decision making
CHOICE

The ability of a consumer or producer to decide

which good, service or resource to purchase or
provide from the range of “possible option”
Scarcity – the state of being scarce or short supply;
shortage
- is the condition of having to choose among
alternatives
Scarce good – is one for which the choice of one
alternative use of the good requires that another be given
up.
Free Good- one for which the choice of one use does not
require that we give up another
WHO MAKES CHOICES ?
Decision makers
1. Household / individuals
2. Firms
3. Governments
4. The rest of the world
WHAT THEY CONSIDER IN MAKING CHOICE
1.Household/ Individual
 Employment
 Wages
 Prices inflation
 Interest rates
 Consumer confidence
FIRMS
Resources such as:
 Land
 Labor
 Capital
 entrepreneurship
3. Governments
 Rules and regulations

4. Rest of the world

o Overall economy, needs and wants of people
o Scarcity
WHAT IS OPPORTUNITY COST ?
Opportunity cost
is the value of the benefits forgonre alternative of the
next best alternative that could have been chosen, but
was not. Another way to look at it is that “choosing is
refusing” one choice can only be accepted by refusing
another.
OPPORTUNITY COST- OPPORTUNITY LOST

subtective – it is in the eye of the beholder. Only the

individual making the choices can identify the most
attractive alternative
TYPES OF OPPORTUNITY COST
1. Explicit Opportunity Cost
Those that are incurred when taking a specific course or action.
It includes wages, materials, purcahse, materials, rents, urtilities
and other tangible expenses.
2. Implicit Opportunity Cost
May or may not have been incurred by forgoing a specific
action. They represent the income or other benefits that could
possibly have been generated had you made the alternative coice.
3. Sunk Cost
Cost that has already been incurred and cannot be recovered,
regardless of what do you do next. You should ignore sunk cost in
making economic choices. Economic decision makers should
consider only those cost that are affected by the choice. Sunk cost
have alrteadyt been incurred and are not affected by the choice, so
they are irrelevant.
THINGS TO BE CONSIDERED IN CALCULATING
OPPORTUNITY COST
1. Time
 Learning about alternatives os time consuming
 Could be a resource of even became a scarcest resource in
some of our decision making
2. Information
 Formulation of process
 Evaluate possible outcome and cost
 Asses the expected marginal benefits
THANK YOU FOR LISTENING, WE HOPE YOU
UNDERSTAND !!