Opportunity Cost and the Free Market
OPPORTUNITY COST & THE FREE MARKET
Scarcity is one of the most basic and crucial points to understand in microeconomics.1Scarcity means that we cannot have all the needs and wants to satisfy our desires. Scarcity can be applied to almost anything. Due to the scarcity of products we must make a choice of what we want. We must choose whether to do one thing or another by what we value to be most important to us. This, therefore, leads to us opportunity cost. Usually when one has to make a decision over what to do, buy, or build, it is narrowed down to two things. We might choose what satisfies our desires, what is more economical, or what is needed more. The choice that we do not take is our opportunity cost, the choice that we value less. Scarcity, choice, and opportunity cost are all related and interlaced with one another. If resources were unlimited we would never have to choose what is more important to have because we would have it all. A good example of applying scarcity would be with time. Have you ever had to decide whether to stay home and study or go out and party? By choosing to go out and party we take time away from our studying. This is a choice that we have to make and whatever we decide not to do is our opportunity cost. Since resources in our economy are limited we must decide what is more important and where to apply our money and time. A production possibility curve shows us opportunity cost and how to get the best possible combination of our two choices. The production possibility curve might help us to better understand how to bring things to equilibrium and therefore not have to sacrifice a choice but to combine them. The production possibility curve is illustrated in a diagram; through the diagram we see the best possible combination to allocate resources. For example, if a government has enough resources to build schools and libraries it should then come to equilibrium and do the maximum possibility of both. As shown on the diagram
Scarcity is one of the most basic and crucial points to understand in microeconomics.1Scarcity means that we cannot have all the needs and wants to satisfy our desires. Scarcity can be applied to almost anything. Due to the scarcity of products we must make a choice of what we want. We must choose whether to do one thing or another by what we value to be most important to us. This, therefore, leads to us opportunity cost. Usually when one has to make a decision over what to do, buy, or build, it is narrowed down to two things. We might choose what satisfies our desires, what is more economical, or what is needed more. The choice that we do not take is our opportunity cost, the choice that we value less. Scarcity, choice, and opportunity cost are all related and interlaced with one another. If resources were unlimited we would never have to choose what is more important to have because we would have it all. A good example of applying scarcity would be with time. Have you ever had to decide whether to stay home and study or go out and party? By choosing to go out and party we take time away from our studying. This is a choice that we have to make and whatever we decide not to do is our opportunity cost. Since resources in our economy are limited we must decide what is more important and where to apply our money and time. A production possibility curve shows us opportunity cost and how to get the best possible combination of our two choices. The production possibility curve might help us to better understand how to bring things to equilibrium and therefore not have to sacrifice a choice but to combine them. The production possibility curve is illustrated in a diagram; through the diagram we see the best possible combination to allocate resources. For example, if a government has enough resources to build schools and libraries it should then come to equilibrium and do the maximum possibility of both. As shown on the diagram
Bibliography: • Maunder, P; Myers, D; Wall, N; and LeRoy Miller, R. Economics Explained. Collins Educational. Second Edition. Copyright 1987. • Samuelson, P and Nordhaus, W. Microeconomics. McGraw-Hill Irwin. Seventeenth edition. Copyright 2001.