Econ: Tradeoffs and Opportunity Cost

The economic choices people make involve exchanging one good or service for another. Exchanging one thing for the use of another is called a tradeoff. Individuals, families, businesses, and societies are forced to make tradeoffs every time they use their resources in one way and not another.

The result of a tradeoff is what you gave up in order to get or do something else. For example, time is a scarce resource. There are only so many hours in a day, so you must choose how to use it. When you decide to study economics for an hour, you are giving up any other activities you could have chosen to do during that time. There is a cost involved in time spent studying economics. Economists call it an opportunity cost. The value of the next best alternative that had to be given up to do the action that was chosen. You may have many tradeoffs when you study. For example, surfing the internet, going to the mall, or practicing the guitar. But whatever you consider the single next best alternative is the opportunity cost of your studying economics for an hour.

A good way to think about opportunity cost is to realize that when you make a tradeoff,  and you always make tradeoffs, you lose. What do you lose? You lose the ability to engage in your next highest valued alternative. In economics, opportunity cost is always an opportunity that is given up.

Being aware of tradeoffs and their resulting opportunity costs is vital in making economic decisions at all levels. Businesses must consider tradeoffs and opportunity costs when they choose to invest money or hire workers to produce one good rather than another. However, many businesses produce more than one type of product. Does this mean that a company makes no tradeoffs? No, what this means is that the company produces combinations of goods which still results in an opportunity cost.

Google Classroom: Question for Today – due Thursday 9/14
2.4 What Do We Give Up When We Make a Choice (read pp.26-29)



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