“Economics is the study of choice made under scarcity.”
The study of economics revolves around scarcity. This is a big idea. In the past few days we have learnt about resources and wants. Scarcity is this idea that limited resources constrain unlimited wants. If we want something, we usually have to give up something else to get it. We all know this.
Good choices; Bad choices
If you want to watch TV at night, then you have to give up on your sleep; You like both soccer and basketball, but you might have to give one up to excel in the other; If you want an A in economics instead of a C, then you have to be willing to spend more of your leisure time on studying.
These are the choices a.k.a trade-offs we make in daily life. Now here’s the next big idea in this article.
Whenever we make a choice, we incur an opportunity cost.
The Cost of Choosing
The opportunity cost of a choice is the value of the next best alternative foregone.
Wow, what a load of jargon. Let’s break it down. We already understand what choices are. So let’s look at value:
If a packet of chicken rice costs $3 and gives you $5 worth of benefits then its value is $2. Then you might ask, how do you know the benefit it gives is worth $5? Very good question, but I am going to leave you to think about this one.
Next, what is ‘next best alternative foregone’? Suppose you had a list of options ranked in descending order of preference. Now that you have chosen one on the list (any one), what is the option left at the top of the list? That is the next best alternative. It is foregone because you didn’t choose it.
So now let’s put everything together with an example. You have two ways to spend an afternoon with your friends: watching a movie or playing arcade. It costs $10 to watch a movie and you get $15 worth of benefits from it. What then is the opportunity cost of going to the arcade?
Your list of options is just two — movie or arcade. So after picking the arcade, your next best alternative foregone is going to the movies. Thus the opportunity cost of going to the arcade is the value of going to the movies, which is $15 – $ 10 = $5! Isn’t this easy?
In summary, limited resources constrain unlimited wants creating a situation of scarcity. Choices made under scarcity incur opportunity costs, which is the value of the next best alternative foregone.
Question of the Day
Answers will be given tomorrow.
Suppose you won a free ticket to see a Justin Bieber concert. You can’t resell it. Ariana Grande is performing on the same night and her concert is the only other activity you are considering. A ticket to the Ariana concert costs $60 and it gives you $70 worth of benefits. There is no other cost of seeing either performer. What is your opportunity cost of attending the Bieber concert?
e. Infinity (;
The answer to yesterday’s question:
Wants are unlimited because as much as we can satisfy them, new wants are constantly being created.
- What does it imply about the choice that you made if its value is less than its opportunity cost?
What is the opportunity cost of attending university?
Do you think there might a relationship between the price of things and the opportunity cost of producing them? Explain intuitively what you think might be the relationship.
We look forward to seeing your responses in the comments section below!
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Till next time, dream economics.
When you have to make a choice and don’t make it, that is in itself a choice.