COMM1100 Chap.2 Opportunity Cost and the Cost-Benefit Principle
Opportunity Cost and the Cost-Benefit Principle
Economics enters COMM1100 through one rule: take an action only if its marginal benefit is at least its marginal cost. The Week 1 practice question and the Week 2 and 3 problem sets apply it again and again, and the trap they set is always the same.
Some costs belong in the comparison and some do not.
This chapter separates out-of-pocket costs from opportunity costs, shows why sunk costs must be ignored, and turns the comparison into an economic-profit test for a start-up decision.
It then measures marginal cost in time and converts it to dollars using the wage you give up, which is how the problem sets ask you to decide how much of an activity to do.
The same comparison sits underneath every later model in the course.
Buyers in a market purchase while marginal benefit covers the price, sellers produce while the price covers marginal cost, and a monopolist expands while marginal revenue covers marginal cost. Mastering it with small, concrete numbers here makes the later graphs far easier to read.
What this chapter covers
- 01
Economics as choice under scarcity; models and empirical tools
- 02
The cost-benefit principle: act if marginal benefit is at least marginal cost
- 03
Opportunity cost as the worth of the best option given up
- 04
Out-of-pocket costs versus opportunity costs; accounting versus economic profit
- 05
Sunk costs and why they leave the comparison
- 06
Marginal cost in hours and in forgone earnings
Worked example · free
Keep the market stall or take the internship?
- +1Out-of-pocket costs are 240 + 380 + 80 = $700, so accounting profit is 1,100 − 700 = $400 a month.
- +1The internship pay is the next best use of the weekends, an opportunity cost of $520.
- +1Economic profit is 400 − 520 = −$120 a month, so on these numbers the internship is the better choice.
Key terms
- Cost-benefit principle
- The rule to take an action if, and only if, its marginal benefit is at least its marginal cost.
- Opportunity cost
- The worth of the best option given up by a choice, including wages and time forgone.
- Sunk cost
- A cost already paid that cannot be recovered whatever is decided, so it should not affect the decision.
- Economic profit
- Revenue minus both out-of-pocket costs and opportunity costs; zero means doing as well as the next best option.
- Marginal cost
- The extra cost of doing one more unit of an activity, measured in money or in time.
- Economic model
- A simplified representation of reality that keeps the features relevant to a particular question.
Opportunity Cost and the Cost-Benefit Principle FAQ
Why should I ignore money I have already spent?
Because a sunk cost is gone under every option. Including it changes the totals equally on both sides, or worse, it tempts you to continue something whose remaining benefits are lower than its remaining costs. Only future costs and benefits that differ between options matter.
What is the difference between accounting profit and economic profit?
Accounting profit subtracts only the money a business pays out. Economic profit also subtracts opportunity costs, such as the salary an owner gives up to run the business, so a business can show an accounting profit and an economic loss.
How do I measure marginal cost when the cost is my time?
Find the extra time the next unit takes, then multiply by the value of that time, usually the wage you could earn instead. Because extra units often take longer, the dollar marginal cost tends to rise as you do more.
What makes an economic model useful?
The Week 2 lecture lists four tests: it is clear and helps us understand something important, its predictions match the evidence, it improves communication about what we agree and disagree on, and it helps us find ways to improve things.
Is opportunity cost always a money amount?
No. It is whatever the best forgone option was worth, which can be time, a forgone activity or another good. The problem sets often measure it in hours first and then convert it to dollars using the wage the person could have earned instead.
Assessment move
Drill the two-list habit until it is automatic: costs that change with the decision, and costs that do not. Then work three types of question under a timer: a sunk-cost scenario, a start-up decision with an opportunity cost, and a marginal-cost table measured in hours. For each, finish with one sentence that states the decision and the reason.
These questions are short, so they are ideal for the first in-tutorial test, which focuses on the first two weeks.
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