Suppose there are two sheep on the common. A villager is considering adding another sheep. If the villager does, he or she is better off by $5 compared to what he or she could earn as a baker. However, he or she imposes a cost of ________ on the other two villagers who already have sheep on the common.

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Opportunity Cost Analysis

Opportunity cost refers to the loss of potential benefits when choosing one alternative over another. It is the tradeoff a person makes, or the potential gains they miss out on, because of their choice. To analyze opportunity cost, we must consider the benefits and tradeoffs of each available option.