Opportunity Cost 2_s07

Opportunity Cost 2_s07 - Opportunity Cost 06/11/2005 The...

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Opportunity Cost 06/11/2005 The Opportunity Cost of an Action (or Item) is the value of the next best alternative foregone. The maximum price a buyer is willing to pay is called the Buyer’s Reservation Price. The Direct Opportunity Costs of an alternative, say A, are e.g. direct net payments that have to be made in order to obtain A. Typically, the direct opportunity costs are simply the nominal price plus other direct (out-of-pocket) expenses of the alternative. (The direct opportunity costs are also called Accounting Costs, because these are the costs that accountants use in regular bookkeeping.) The Net Benefit of an alternative is the benefit of the alternative minus its opportunity costs. The Consumer Surplus of an alternative is the benefit of the alternative minus the direct opportunity costs. The Indirect Opportunity Costs of an alternative is the benefit minus the direct costs of the next best alternative – i.e. the indirect opportunity cost is the consumer surplus of the next best alternative. Finally, (Total) Opportunity Costs of an alternative is the sum of its direct and indirect opportunity costs. (The indirect opportunity cost are not included in accounting costs!) Notation . Benefit of A = B(A), Direct Opportunity Costs of A = DOC(A), Reservation Price of A = RP(A) = B(A), Net Benefit of A = NB(A), Opportunity Cost of A = OC(A) and Consumer Surplus CS(A). Definitions. (1) RP(A) = B(A) (2) CS(A) = B(A) – DOC(A) The Consumer Surplus on the n th unit purchased in a market is illustrated here. The direct opportunity costs is simply the price paid!
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This note was uploaded on 06/11/2011 for the course ECON 102 taught by Professor Lemche during the Winter '08 term at UBC.

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Opportunity Cost 2_s07 - Opportunity Cost 06/11/2005 The...

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