OPPORTUNITY COST AND MARKETS

Now you tell me that opportunity cost is the righ~ con: cept. Can’t you economists make up your minds? Actually, there is a simple explanation: In well functioning markets, when aU costs are incl~, frr!ce equals <1’Portunity cost. Assume that a commodity like wheat is bought and sold in a competitive market, If I bring my wheat to market, I will receive a number of bids from prospective buyers: $2.502, $2.498, and $2.501 per bushel. These represent the values of my wheat to, say, three different flour mills. I pick the highest-$2.502. The opportunity cost of this sale is the value of the best available alternative-that is,
the second-highest bid, at $2.50l-which is almost identical to the price that is accepted. As the market approaches perfect competition, the bids get c1os~r . and closer until, at the limit, the second-highest bid , (which is our definition of opportunity cost) exactly equals the highest bid (which is the price). In competitive markets, numerous buyers compete for resources
to the point where price is bid up to the best available alternative and is therefore equal to the opportunity cost.

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