Opportunity Cost

Do you have things you want? Probably not. Very few people ever reach the stage where they have everything they want. In fact, one want often leads to another. It is important to point out however, that there is a difference between wants and needs. Everyone needs food, clothing and shelter but other so-called “needs” are really “wants”. For example, you may insist that you need a car but you may live in an area where you really don’t have to have one. You can walk, bicycle, or rely on public transportation to get around. Similarly, you may want new clothes, but whether or not you need them is a value judgement. If you think about it, you probably will agree that most people's needs are limited. In contrast, people's wants are unlimited.

Because of the problem of scarcity nations, businesses, and individuals all must make choices in an effort to satisfy unlimited wants with limited resources. These choices are not always easy. Suppose you have saved some money and are thinking of buying a new bicycle. Before buying the bicycle, however, you may give some consideration to the possibility of buying something else instead. Would a stereo system give you more pleasure than the bicycle? What about the possibility of buying a used bike so you will have enough money left over to buy the new shoes you need or to put some money aside for college? Or would it be better to save the money toward a down payment on a used car that you can use on your part-time job as well as at college? Because your income is limited and you can buy only a limited number of things, you probably will give considerable thought to the situation before making your purchase.

However you decide to use your money you will have to give up the opportunity to purchase something else that also may have given you pleasure. If you decide to purchase the second-hand bicycle so that you will have some money to put aside for college, you will have to give up the opportunity to buy the stereo system or to buy the new bicycle. Economists use the term opportunity cost to refer to the next best alternative that is given up when a decision is made to use resources in a particular way. In this example, if your second choice would have been the purchase of a stereo system, then the opportunity cost of buying the used bicycle and putting aside the money for college is the stereo system you could have had.

Money is not the only scarce resource that individuals have. Time is also a scarce resource. Suppose that on a particular Saturday night you have the opportunity to go out on a date with a person you like very much. At the same time, you also have the opportunity to go roller-skating with several of your friends. Because you can't do both you must make a choice. No matter which choice you make, you are going to pay a price in terms of the opportunity cost of your decision. If you decide to go out on the date the opportunity cost of your choice is giving up the opportunity to go roller skating. If you decide to go roller skating, the opportunity cost of that decision is giving up the opportunity to go out on the date.

Nations, too, are constantly faced with the realities of opportunity costs. For example, the government must decide how much it will spend for national defence and how much will be spent on non-defence programs, such as education, transportation, and other public services. Since the government has a limited amount of money, a decision to spend more money on national defence usually will require funding for non-defence programs to be cut. Thus, the opportunity cost of the increased defence spending is the reduction of funding of non-defence programs.

Ex. 1. Choose the best answer to the following questions, using the text.

1. Why is scarcity the most basic of all economic problems?

a. because the federal government must decide how much it will spend for natural defence.

b. it gives you an opportunity to buy something else.

c. because it is the most important issue in balancing unlimited needs with limited resources.

2. What is meant by the term “opportunity cost”?

a. it is your limited income.

b. it is defined as a decision to spend money.

c. it refers to the next best alternative that is given up when a decision is made to use resources in a particular way.

3. How do opportunity costs affect both individuals and nations?

a. a state must spend less money on education.

b. an individual has to give up something that gives him pleasure.

c. an individual or a nation has to sacrifice something for the choice made.

Ex. 2. Say if these statements are true or false.

1. Because of the problem of scarcity nations, businesses, and individuals all must make choices in an effort to satisfy unlimited wants with limited resources.

2. Economists use the term opportunity cost to refer to the next best alternative.

3. Any time you decide to use scarce resource in a particular way, you do not incur an opportunity cost – the cost of the next best alternative use of that resource.

4. Governments never have problems with defence spending.

Text 3

As you read the text, focus on the following terms: 1) economic goods; 2) economic services; 3) factors of production.