Opportunity Cost and Thinking at the Margin

Economists are always looking at the impact a decision has on all surrounding options. The term opportunity cost is simply a way of looking at what is being sacrificed in the decision making process. To put it plainly, when something is chosen, then something is refused. The item or service that is forgone is the opportunity cost. To apply this concept we will need to use some examples.

When you enter a fast food restaurant, you are presented with a variety of options. Since you are hungry you choose to order food. On the menu are Tacos, Burritos, Nachos, and Sodas. You only have enough money for three items. Since you do not enjoy the aroma of cheese you avoid the nachos; and since you know that you'll be thirsty you choose the soda. So you order one taco, one burrito, and one soda. You had the opportunity to order nachos but you could not afford the cost. The nachos then become the opportunity cost.

Opportunity cost is found in decisions everyday. Let us say that you have three options to get to school. You can walk, ride a bicycle, or ride a bus. If you were to prioritize these options first to third, then the second most desirable option is the opportunity cost. You need to get to school on time so walking is third. It is a little chilly outside so the bicycle option is second. Thus, your first option is to take the bus. By taking the bus your refused the second option - the bicycle. In this scenario, the opportunity cost is the bicycle.

If we were to add several more options to our scenarios above, we could then apply the concept of thinking at the margin. If the fast food restaurant had small, medium, large, and extra large varieties on all food and drinks, then you may consider decreasing or increasing one size option so as to similarly increase or decrease the size of another option. Thinking at the margin occurs when a choice is slightly modified by a factor of one to affect a change on the other possible options. If your boss sent you home one hour early to avoid paying you additional money, then he or she is thinking at the margin by reducing their labor cost by one unit of time.