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Should I stay or should I go?
--The Clash

 Class 002

Tradeoffs and Opportunity Cost.

Because of scarcity, people must make choices about how they will use their resources. Choices are explained in terms of trade-offs or alternatives that are available whenever a decision is made. The cost of every decision is measured in terms of its opportunity cost, which is the cost of the next best alternative use of money, time, or resources when one choice is made rather than another. Trade-offs can be analyzed with a production possibilities frontier, a diagram representing various combinations of goods and services an economy can produce when all its resources are in use.

In practice, economists tend not to talk about early birds and greener grasses. They've developed their own more technical vocabulary to describe the world of scarcity and choice.

For example, when we sacrifice one thing to obtain another, that's called a trade-off. Only have enough cash to buy a bike or a snowboard, but not both? That's a trade-off. Trying to decide whether to take the Fourth of July off to spend with your family, or to go to work and make extra overtime? That's a trade-off.

Trade-offs create opportunity costs, one of the most important concepts in economics. Whenever you make a trade-off, the thing that you do not choose is your opportunity cost. To butcher the poet Robert Frost, opportunity cost is the path not taken (and that makes all the difference). You bought that bike? Then the snowboard was your opportunity cost. Decided to work on the Fourth of July? Your opportunity cost was a relaxing day hanging out with the family at the BBQ.

Everything has opportunity costs. If you just bought something, you could have always chosen to buy something else instead. If you just chose to spend your time in a particular way, you could have always done something else. "Something else" is your opportunity cost.

Why It Matters Today
Sometimes opportunity costs can vastly exceed the sticker price of an item. Imagine you scored a ticket to the Super Bowl. You paid $200 for your ticket, a stretch for your budget but worth it for a once-in-a-lifetime opportunity. You sit down in your seat next to some schmuck who admits he paid $5000 to a scalper for his ticket. Five grand! That's madness.

But hold on. Your ticket just cost you five grand, too, even though only $200 in cash ever left your wallet. How's that work? Well, if the schmuck next to you was willing to buy a seat for $5000, then you could have sold yours at that price, too. The opportunity cost of you using your ticket is the five grand you didn't make by scalping it.

Hope it was a good game!

 

 

 

 

 

Success comes in cans, failure in can'ts.
- Author Unknown

 

 

Opportunity is always knocking. The problem is that most people have the self-doubt station in their head turned up way too loud to hear it.
- Brian Vaszily

 

 

Opportunity dances with those who are already on the dance floor.
- Jackson Brown

 

 

 

People often say that motivation doesn't last. Well, neither does bathing - that's why we recommend it daily.
- Zig Ziglar

 

 

 

Life is not about how fast you run, or how high you climb, but how well you bounce.
- Unknown

 

 

 

 

 

 

 

 

 

 

http://www.economicshelp.org/blog/2177/economics/
opportunity-cost-definition/

 

http://www.shmoop.com/economic-principles/opportunity-costs.html