Opportunity Costs

“The economic actor takes into account alternative possible applications; choosing one possible use means sacrificing other possible uses.”

When a person purchases a good in the market, either with money or direct exchange of another good, what cost does that person incur?

Hint: not the money or item given in exchange.

The cost incurred consists of all of the items that might be exchanged for that same money or item. The specific cost consists of the next highest item on the buyer's preference scale.

Incurring costs play an important role in individual decisions about resource allocation. The existence of opportunity costs assures the that consumers will always pick their most preferred item.

When opportunity costs do not exist, or get reduced in one way or the other, consumers will naturally demand more goods than they would otherwise.