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ModULE 1.1
Just as individuals must make choices, the scarcity of resources means that society AP ECoN TIP
®
as a whole must make choices. One way for a society to make choices is simply to allow
them to emerge out of many individual choices. For example, there are only 168 hours Economists have special
in a week, and Americans must decide how to spend their time. How many hours will meanings for many words.
they spend going to supermarkets to get lower prices rather than saving time by shop- For example, economists use
ping at convenience stores? The answer is the sum of individual decisions: society’s the term land in reference to
choice about where to shop is simply the sum of the choices made by the millions of all sorts of natural resources
individuals in the economy. and raw materials such as
silicon, cotton, and even
Opportunity Cost: The Real Cost of Something water. Economists generally
Is What You Must Give Up to Get It use the term capital to refer
to the category of factors
Suppose it is your last year of high school and you are deciding which college to attend. of production made up of
You have narrowed your choices to a small college near home or a large state university manufactured goods used
several hours away. If you decide to attend the small local college, what is the cost of to make other goods and
that decision? Of course, you will have to pay for tuition, textbooks, and housing no services. Don’t confuse this
matter which college you choose. Added to the cost of choosing the local college is the type of capital with financial
forgone opportunity to attend the large state university, your next best alternative. The capital such as money,
value of going to the state university may be small or large, depending on your inter- stocks, and bonds.
ests and preferences. Economists call the value of the next best alternative that you
must give up when you make a particular choice an opportunity cost. The real cost of an item is its
Opportunity costs are crucial to choices because, in the end, all costs are opportu- opportunity cost: the value of
nity costs. That’s because with every choice, an alternative is forgone — money or time the next best alternative that
spent on one thing can’t be spent on another. If you spend $10 on a pizza, you forgo you must give up in order to get
the opportunity to spend that $10 on a hamburger. If you spend Saturday afternoon at the item.
the park, you can’t spend Saturday afternoon doing homework. And if you attend one
school, you can’t attend another.
The park and school examples show that economists are concerned with more than
just costs paid in dollars and cents. The forgone opportunity to do homework has no
direct monetary cost, but it is an opportunity cost nonetheless. And if the local college
and the state university have the same tuition and fees, the cost of choosing one school
over the other has nothing to do with payments and everything to do with forgone
opportunities.
Now, suppose tuition and fees at the state university are $5,000 less than at the
local college. In that case, what you give up to attend the local college is the ability to
attend the state university plus the benefit you could have gained from spending $5,000
on other things. So the opportunity cost of a choice includes all the costs — whether or
not they are monetary costs — of making that choice.
The choice to go to college at all provides another important example of opportu-
nity costs. High school graduates can either go to college or seek immediate employ-
ment. Even with a full scholarship that would make college “free” in terms of monetary
costs, going to college would still be an expensive proposition because the time spent
on schoolwork can’t be spent earning money. By going to college, students forgo the
income they could have earned if they had gone straight to work instead. Therefore,
the opportunity cost of attending college is the value of all necessary monetary pay-
ments for tuition and fees plus the forgone income from the best available job that
could take the place of going to college.
The opportunity cost of going to college is high for people who could earn a lot
during what would otherwise be their college years. Soccer standout Mallory Pugh
withdrew from her first year in college because the opportunity cost of continuing
would have included her salary and Nike endorsement deal as a professional soccer Cory Knowlton/ZUMA Press, Inc./Alamy
player. Facebook co-founder Mark Zuckerberg, Dropbox co-founder Arash Ferdowsi,
and singer Taylor Swift are among the high achievers who decided that the opportu-
nity cost of completing college was prohibitive. Despite these notable exceptions, how-
ever, for most people the value of a college degree far exceeds the value of alternative Mallory Pugh understood the
earnings. concept of opportunity cost.

Module 1.1 Scarcity and Choice 5
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