A s you learned in Section 1, scarcity forces people to make choices about how they will use their resources. In this section, youll learn that the effects of these choices may be far-reaching and long-lasting. For example, one day you may choose to either go to work for a company or open your own business. Such a decision would affect many aspects of your life, including how much you earn and how you manage your time.
Trade-Offs
Economic decisions always involve trade-offs that have costs.
Economics & You
Think about the last time you spent an hour watching television. Were there other ways you could have spent your time? Read on to learn about c one way means giving up other alternatives.
The economic choices people make involve exchanging one good or service for another. If you choose to buy an iPod, you are exchanging your income for the right to own the iPod. Exchanging one thing for another is called a trade-off. Individuals, families, businesses, and societies are forced to make trade-offs every time they use their resources in one way and not another.
The Cost of Trade-Offs
The cost of a trade-off is what you give up in order to get or do something else. Time, for example, is a scarce resourcethere are only so many hours in a dayso 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.
Trade-Offs
If you decide to go to college rather than work full-time right after high school, you are giving up the opportunity to start making money right away. You also may have to take on the burden of student loans. These are the trade-offs you make to gain a college education and increase your potential earning power later.
In other words, there is a cost involved in time spent studying this book. Economists call this 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 trade-offs when you studyexchanging instant messages with your friends, going to the mall, watching television, or practicing the guitar, for example. But whatever you consider the single next best alternative is the opportunity cost of your studying economics for one hour.
A good way to think about opportunity cost is to realize that when you make a trade-off (and you always make trade-offs), you lose something. What do you lose? You lose the ability to engage in your next highest valued alternative. In economics, therefore, opportunity cost is always an opportunity that is given up.
