Syllabus T. Y. B. A. Paper : IV advanced economic theory with effect from academic year 2010-11 in idol

Opportunity cost is the cost we pay when we give up 
something to get something else. There can be many alternatives 
that we give up to get something else, but the opportunity cost of a 
decision is the most desirable alternative we give up to get what we 
want. 
Let‘s look at our examples from above. If you have a job, 
what do you give up to go to work? There are many possibilities. I 
could sleep in. If it is a nice day I could take my dog to the park and 
play all day. Or, I could even spend the day looking for a better job 
right? I give up all of these things if I choose to go to work. What I 

---

get from working is a greater benefit than the cost of giving up 
these things. But, opportunity cost is the most desirable thing given 
up not the aggregate of the things we gave up. 
Let‘s look at the college example. We are all told to go to 
college so you can get a good education and that will translate into 
a good job. How do we know that college is such a good thing? 
How much college do we need? Let‘s look at some numbers from a 
2002 study on education from the Institute of Government and 
Public Affairs. 
―There are distinct benefits of a college education. A study 
conducted in April of 2002, by the Institute of Government and 
Public Affairs for the Illinois Board of Higher Education, showed the 
following benefits: 
Higher Earnings - 
Earning a bachelor‘s degree provides the 
average student with over $590,000 in future earnings. 
Similarly a professional degree provides a present value to 
the student of almost $1.25 million in future earnings.
Labor force participation rates and employment rates for 
people aged 25 and over increase with increased levels of 
education.
People with college experience contribute time and money to 
charitable causes at a higher rate than those with less 
education.
Increased levels of education are associated with the 
increased likelihood of voting or registering to vote. 
In addition, college can provide many other benefits that are 
less tangible, and will help your child become a better-rounded 
individual. Benefits include increased self-awareness, the ability to 
think critically, and an opportunity to meet many different people. 
Overall, the entire college experience will provide your child with a 
lifetime of benefits‖. 
As we can see there are many benefits to a college 
education. So what are the costs? There are monetary costs for 
sure. Also, we will spend four or more years going to classes. We 
could be working and earning money instead of going to college. 
Finally we will be giving up free time for study time that could be 
used to do other things. 
What about spending money on a missile defense system? 
In the fiscal year 2006 budget the taxpayers of Colorado will spend, 
as a fraction of overall federal spending, $150.7 million for the 
ballistic missile defense system (Center on Arms Control and 
Nuclear Proliferation). That same money could pay for 27,547 

---

people to get health care (Centers for Medicare and Medicaid Data 
Compendium) or, 37,384 scholarships for university students 
(National Center for Education Statistics). These represent real 
choices that the government must make with our Tax dollars. The 
opportunity costs in this case depend upon what you value more 
military spending, health care, or college scholarships. 
To get a graphical representation of how an economy makes 
decisions on what to produce, or spend their money on, we will use 
a Production Possibilities Curve.