Opportunity Costs

Opportunity costs are caused by the situation when you want to buy something and another thing but you can’t have one of them so that becomes your opportunity cost. In economics, opportunity cost, or economic cost, is the cost of something in terms of an opportunity forgone (and the benefits which could be received from that opportunity), or the most valuable forgone alternative (or highest-valued option forgone), i.e. the second best alternative.

For example, if a city decides to build a hospital on vacant land it owns, the opportunity cost is the value of the benefits forgone of some other thing which might have been done with the land and construction funds instead. In building the hospital, the city has forgone the opportunity to build a sporting center on that land, or a parking lot, or the ability to sell the land to reduce the city’s debt, since those uses tend to be mutually exclusive. Also included in the opportunity cost would be what investments or purchases the private sector would have made if it were not taxed to build the hospital. The total opportunity costs of such an action can never be known with certainly (and are sometimes called “hidden costs” or “hidden losses”, what has been prevented from being produced cannot be seen or known).

Opportunity cost need not be assessed in monetary terms, but rather can be assessed in terms of anything which is of value to the person or persons doing the assessing (or those affected by the outcome). For example, a person who chooses to watch, or to record, a television program cannot watch (or record) any other at the same time.

Note that opportunity cost is not the sum of the available alternatives, but rather of benefit of the best alternative of them. The opportunity cost of the city’s decision to build the hospital on its vacant land is the loss of the land for a sporting center, or the inability to use the land for a parking lot, or the money which could have been made from selling the land, or not all of these altogether because the land cannot be used for more than one of these purposes.

However, most opportunities are difficult to compare. Opportunity cost has been seen as the foundation for a number of economic theories.

Vocabulary list

1. raw materials – сырье

2. labour – труд, работа

3. to utilize – использовать

4. revenue – доход (годовой, особенно государственный)

5. transaction – сделка

syn. deal

6. market economy – рыночная экономика

7. to act on somebody’s behalf – действовать от лица и по поручению кого-либо

8. supply – предложение, снабжение v. to supply somebody with something

9. demand – спрос, требование

10. demand for something – спрос на что-либо

11. on demand – по требованию

12. to exceed – превышать

13. input – вложение

14. to guide – направлять, определять

15. output – выпуск, продукция

16. to govern – управлять, регулировать

17. preference – предпочтение

18. production costs – издержки производства

19. to determine – определять

20. opportunity costs – альтернативные издержки

21. to assess smth – оценить, подсчитать

n. assessment

22. in monetary terms – в денежном выражении

23. syn. min terms of money

Notes

1. the needy – нуждающиеся

2. given the scarcity of resources – сучетомнедостаткаресурсов

3. … fiscalandmonetarypolicybeingthemajorfacts – … причем бюджетно-налоговая и кредитно-денежная политика являются основными факторами

4. an opportunity forgone – упущеннаявозможность

5. interaction – взаимодействие

Ex 1. Suggest the Russian equivalents:

scarcity of resources; the rational solution to the problem; equitable distribution of revenues; a set of arrangements; at each unit price of the good; the compositions of output; the most valuable forgone alternative; mutually excluded; to be known with certainty assessed in monetary terms.

Ex 2. Fill in the gaps with the words and expressions from the text.

1. Any economic system is trying to find most …… and …… way of …… for the production of goods and services.

2. One of the main laws of the market is the ……

3. Supply is the …… between the price of a good and the quantity …… for sale from suppliers.

4. In free markets, prices direct …… of firms that make the most …… use of them.

5. The price …… also guides the decisions of producers concerning the …… of their ……

6. In economics, opportunity cost, or ……, is the cost of something in terms of an …….

7. Opportunity cost is not the sum of the ……, but rather of …… of them.

Ex 3. Find in the text the English equivalents for the following:

сырье; трудовые ресурсы; использование ресурсов; справедливое распределение доходов; свободное предпринимательство; бесчисленный; действующий от чьего-либо имени; по цене за единицу продукции; предложение превышает спрос; управлять процессом распределения; выгоды, которые могли быть получены; скрытые издержки; оцененный в денежном эквиваленте; иметь ценность для кого-либо.

Ex 4. Match each term with the appropriate explanation.

market, labour resources, supply, demand, cost

1. The amount of a commodity that the public are ready to buy at a certain price.

2. The amount of an economic good that will be offered for a sale in the market at a certain price and time.

3. The mechanism which allows individuals and organizations to trade with each other.

4. The physical and mental talents that people can make available for production.

5. The real effort and sacrifice needed to produce goods and services.

Ex 5. Answer the questions and do the assignments.

1. How can economic resources be classified?

2. What is the most efficient economic system?

3. How does the market operate?

4. What is the price determined by?

5. What role does the price mechanism play in free-market economy?

6. What does the allocation of resources reflect?

7. What does the law of supply and demand say?

8. What stands for the notion “opportunity costs”? Is it necessary assessed in monetary terms? Give examples.

Ex 6. Find in the text the words and phrases that refer to the following notions and comment on them:

1. scarcity of resources

2. the law of supply and demand

3. the market mechanism

4. an opportunity forgone

5. hidden costs (losses)

Ex 7. Comment on the statements.

1. The higher the price at which the good can be sold, the more of it producers will supply.

2. Opportunity cost need not be assessed in monetary terms.

3. Most opportunities are difficult to compare.

Text B

There are a number of ways in which a government can organize its economy and the type of system chosen is critical in shaping environment in which businesses operate.

An economic system is quite simply the way in which a country uses its available resources (land, workers, natural resources, machinery etc.) to satisfy the demands of its inhabitants for goods and services. The more goods and services that can be produced from these limited resources, the higher the standard of living enjoyed by the country’s citizens.