Section 1: Opportunity Cost and Decisions chapter
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In Chapter 1 we introduced some core principles underlying economic decisions.
We’ve just seen two of those principles at work in our tale of two invasions. The first
is that resources are scarce—the invading Allies had a limited number of landing craft,
and the invading Germans had a limited number of divisions. Because resources are
scarce, the true cost of anything is its opportunity cost—that is, the real cost of something is what you must give up to get it. When it comes to making decisions, it is crucial to think in terms of opportunity cost, because the opportunity cost of an action
is often considerably more than the simple monetary cost.
Explicit Versus Implicit Costs
Suppose that, after graduating from college, you have two options: to go to school for
an additional year to get an advanced degree or to take a job immediately. You would
like to take the extra year in school but are concerned about the cost.
But what exactly is the cost of that additional year of school? Here is where it is
important to remember the concept of opportunity cost: the cost of that year spent
getting an advanced degree is what you forgo by not taking a job for that year.