A High School Economics Guide

Supplementary resources for high school students

Definitions and Basics

Opportunity Cost, from the Concise Encyclopedia of Economics

When economists refer to the “opportunity cost” of a resource, they mean the value of the next-highest-valued alternative use of that resource. If, for example, you spend time and money going to a movie, you cannot spend that time at home reading a book, and you can’t spend the money on something else. If your next-best alternative to seeing the movie is reading the book, then the opportunity cost of seeing the movie is the money spent plus the pleasure you forgo by not reading the book….

Getting the Most Out of Life: The Concept of Opportunity Cost, by Russ Roberts. Econlib, Feb. 5, 2007.

To get the most out of life, to think like an economist, you have to be know what you’re giving up in order to get something else….

Opportunities and Costs, by Dwight Lee. FEE.org.

Economics has been called the dismal science because it studies the most fundamental of all problems–scarcity. Because of scarcity we all face the dismal reality that there are limits to what we can do. No matter how productive we become, we can never accomplish and enjoy as much as we would like. The only thing we can do without limit is desire more. Because of scarcity, every time we do one thing we necessarily have to forgo doing something else desirable. So there is an opportunity cost to everything we do, and that cost is expressed in terms of the most valuable alternative that is sacrificed….

Opportunity Cost, from BusinessDictionary.com

A benefit, profit, or value of something that must be given up to acquire or achieve something else. Since every resource (land, money, time, etc.) can be put to alternative uses, every action, choice, or decision has an associated opportunity cost.

Opportunity costs are fundamental costs in economics, and are used in computing cost benefit analysis of a project. Such costs, however, are not recorded in the account books but are recognized in decision making by computing the cash outlays and their resulting profit or loss.

In the News and Examples

Opportunity cost, movies, and reading: Tyler Cowen on Your Inner Economist. EconTalk podcast episode, September 10, 2007.

“Economics is the study of how to get the most out of life.” Tyler Cowen, of George Mason University, talks about his new book, Discover Your Inner Economist: Use Incentives to Fall in Love, Survive Your Next Meeting, and Motivate Your Dentist. Cowen, legendary blogger at MarginalRevolution.com, talks with EconTalk host Russ Roberts about the economics of parenting, reading, dentistry, art museums and education. Highlights include Tyler’s favorite art museum and what to see there along with the challenges of being a tourist in Morocco….

Biggest cost of college is what students could otherwise earn by working: Human Capital, by Nobel Prize winner Gary Becker in the Concise Encyclopedia of Economics

Tuition and fees are not the only cost of going to college. Indeed, for most college students they are not even the major cost. On average, three-fourths of the private cost—the cost borne by the student and by the student’s family—of a college education is the income that college students give up by not working. A good measure of this “opportunity cost” is the income that a newly minted high school graduate could earn by working full-time. And during the eighties this forgone income, unlike tuition, did not rise in real terms. Therefore, even a 39 percent increase in real tuition costs translated into an increase of just 10 percent in the total cost to students of a college education.

Opportunity cost and TANSTAAFL: Chris Anderson on Free. EconTalk podcast episode, May 12, 2008. Specifically, explanation of the economic meaning of “There ain’t no such thing as a free lunch,” starting at time mark 47:11.

Chris Anderson talks with EconTalk host Russ Roberts about his next book project based on the idea that many delightful things in the world are increasingly free–internet-based email with infinite storage, on-line encyclopedias and even podcasts, to name just a few. Why is this trend happening? Is it restricted to the internet? Is there really any such thing as a free lunch? Is free a penny cheaper than a penny or a lot cheaper than that? The conversation also covers whether economics has anything to say about free….

Opportunity cost, rock concerts, and grades: A Fable of the OC, by Mike Munger. Econlib, Apr. 3, 2006.

You get to the box office about midnight, but don’t sleep much because it’s noisy. Finally, sleep does come. It only seems like a few minutes later when the clank of the ticket window opening wakes you at 8:00 am. In the sunlight, you notice that there are way more people in line than you thought. Thousands, in fact. You may not get tickets, even after camping out.

But you start thinking about opportunity cost, the big OC. You recall from economics class that the OC is about foregone alternatives. In other words, the cost of doing one thing is all the other things you don’t get to do as a result….

I used this fable (sort of—it was Bruce Springsteen then) as a test question in my intermediate Microeconomics class at Dartmouth College….

Opportunity cost and crowding out of public projects. Public funding of public works projects is at the expense of other alternative, forgone, and equally worthy projects and goals. See: “The Seen and the Unseen: The Costly Mistake of Ignoring Opportunity Cost”, by Anthony de Jasay. Econlib, Jan. 10, 2005.

Yet “crowding out” is inevitable, for the same million cannot be spent on two alternative projects, each of which costs a million. The crowded-out alternative is not seen. It is quietly ruled out by the market because it is not judged capable of meeting the test of at least paying for itself.

Opportunity Cost and Hidden Inventions, by Dwight Lee. FEE.com.

Hidden Inventions: A persistent claim is that in market economies where the profit motive reigns supreme, extremely valuable inventions are hidden to prevent their sale. Supposedly, if the inventions were available they would destroy the profits of big corporations by making their products obsolete. So these corporations buy up wonderful inventions to make sure we can’t buy them.

That an amazing invention has never been found in some secret warehouse does nothing to reduce people’s belief that such things exist; they’re hidden, aren’t they? The reality is that the opportunity cost of hiding a valuable invention is so great that inventions worth more than they cost are quickly made available. Hidden inventions exist only in economically uninformed imaginations….

A Little History: Primary Sources and References

Early use of the term “opportunity cost”: The Theory of Choice and of Exchange, by Frank Knight. Part II, Chapter 3 in Risk, Uncertainty, and Profit

In spite, therefore, of the purely relative character of pain and pleasure and of the essential parity as motives of all alternatives of conduct, it is pragmatically necessary to distinguish in productive activity between the incoming “economic” utility and the sacrificed (resources, representing) non-economic, unspecified alternatives in general, between utility and disutility, or commodity and cost. “Cost,” in this sense, is “pain cost,” or “opportunity cost,” as one prefers; there is no real difference in meaning between the two…. [par. II.III.33]

Advanced Resources

Ticket Scalping and Opportunity Cost. EconTalk podcast, April 10, 2006.

Michael Munger of Duke University and host Russ Roberts talk about the economics of ticket scalping, examining our reactions to free and found goods, gifts, e-Bay, value in use vs. value in exchange, and opportunity costs.

Related Topics

Decision Making and Cost-Benefit Analysis