Question

Katie considers the alternatives that will be lost if she decides to spend her savings on buying a car. What is the economic term for her thought process?

Answer 1

The economic term that is associated with considering the alternatives that will be lost in a situation like this is "opportunity cost," since you're losing the opportunity to do something else.

Answer 2

The economic term is the opportunity cost.

The concept of opportunity cost is a relatively inexpensive and relative measure that involves people's preferences, so it varies from person to person. It is a question of comparing what is left over when making a decision.

In Katie's case, the opportunity cost of the money she saves to buy a car is what she fails to do with that money. For example, she stops investing in stocks, fails to make a trip, etc.

All decisions involve an opportunity cost. Taking another example, the opportunity cost of studying for the test at the end of the week is measured by the loss of leisure you would have. However, the decision to study for the test is chosen because it is more valuable.