Figure 1-1 Choosing Between Road Repair and New Bicycle Paths
Scarcity implies that choices must be made, and making choices implies the existence of costs.Opportunity Cost
To see how choice implies cost, we look first at an example of a single
decision maker and then at an example for the country as a whole. Both
examples involve precisely the same fundamental principles.
Consider Susan, a senior planner who works for a small Canadian city.
She is allocated a budget of $12 million for the year and must decide how
to allocate it between two activities—repairing existing roads and building
new bicycle paths. Repairing roads costs $1 million per kilometre
repaired; new bicycle paths cost $500 000 per kilometre to build.
The choices that Susan and her planning department face are illustrated
in Figure 1-1. The amount of new bicycle path is shown in kilometres
along the horizontal axis. The kilometres of road repair is shown along
the vertical axis. The downward-sloping line is Susan's budget line—it
shows the various combinations of the two activities that use up the full
budget of $12 million. Since it is possible to build fractions of a kilometre
of bicycle path as well as repair fractions of a kilometre of road, all points
along the budget line are attainable combinations of the two activities.
Any combination outside the budget line—such as point a—is
unattainable; the total cost of this combination requires more than the
available budget.