Question

Explain the relationship between changes in opportunity cost and changes in behavior.

Short answer

Changes in opportunity cost can significantly impact an individual's behavior. As opportunity costs increase (the sacrifices for a certain behavior become greater), that behavior becomes less attractive leading to a change to more beneficial options. Conversely, if the opportunity costs decrease, that behavior becomes more appealing compared to other alternatives.

Step-by-step solution

Understanding Opportunity Cost

Opportunity cost refers to the potential benefits an individual, investor, or business misses out on when choosing one alternative over another. To understand this relationship, it is crucial to grasp how the concept of opportunity cost works first.

Analyze the Impact of Changes in Opportunity Cost

When the opportunity cost of a specific behavior increases, it becomes less attractive because you are sacrificing more to perform that behavior. Conversely, if the opportunity cost decreases, that behavior may become more appealing compared to other alternatives.

Relating Opportunity Cost and Behavior

Because individuals and businesses strive to make the most effective use of their resources, they tend to engage in behaviors that minimize their opportunity costs. This means that behavior generally changes to avoid high opportunity costs and instead pursue activities with lower opportunity costs. This is the fundamental concept of making choices that economics is built upon.

Practical Example

For example, if you decide to spend an hour studying for an exam, the opportunity cost is the time you could have spent hanging out with friends, watching a movie, or doing various other things. If your grades begin to suffer because you're spending too much time having fun and not enough time studying, the opportunity cost of leisure time may rise. Consequently, you might reduce your leisure time and spend more time studying, demonstrating a change in behavior due to the change in opportunity cost.