Blog post 1- Intro to economics: OpportuniTy coSt
One day, your friends ask you to hangout with them to watch a movie worth 250 pesos and they plan to also rent a basketball court after the movie is over. You are not entirely sure if you are going to accept their invitation or not since you have an upcoming math test the day after. You can use this time to study for the math test instead of hanging out with your friends. In this scenario, which choice would you pick? Would you hangout with your friends and spend money for the movie and the basketball court and at the same time have fun? or would you rather stay at home and study for the math test and at the same time save money for future use? Between these two scenarios, you are able to pick only one. The value of the scenario that you did not pick in this case is called the opportunity cost.
what is opportunity cost?
The opportunity cost is the value lost upon picking one between two alternatives. It is the loss of the chance of benefitting from a choice one did not pick. It is what you sacrifice to get something else. An example is the scenario earlier in which picking one will forgo the other, when you choose to hangout with your friends, you earn their trust and strengthen your friendship with each other however, you lose the chance to study for your math test which might result to you getting a low score if not failing it. On the other hand, if you choose to study for your math test and stay at home instead of going out, you get to save money and have enough study time for you to ace the math test, the result of this however is that the chance of you getting closer with your friends through spending time with them would not exist as you spent your time studying. These are just some examples of opportunity costs at a small scale, in this case, that of a typical student.
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Opportunity cost in society
From planning out our daily activities and managing our time, the presence of opportunity costs can be found everywhere. This is why it is extremely important for one to know how opportunity costs work in order to be able to predict the benefit and the value of a certain choice for better results in decision making. First of all, one must logically consider consequences of a choice and its opportunity costs. Economists often consider the alternative with the "greatest benefit and the lowest cost" to be the right decision in most situations, specially in major companies who would want as much as possible, to benefit at a low cost. We already established that making decisions plays a major role in determining the opportunity cost of two possible paths, therefore one must always put into mind the benefit and cost altogether and not just the benefit or the cost alone. Thinking about either the benefit or the cost alone will result to wrong decisions being made that one might soon regret.
An issue involving opportunity cost (continuation)
An example that can be related to this is the issue of unemployment and dropouts which is relevant not only in the Philippines, but also in many other countries. Pretend that you are a student who wants to go to college and you know that doing so will give you the opportunity to get a good job. However, your going to have to spend a lot for the tuition and the books. You can choose not to attend college and work instead, but your job requires you to pay for an application fee and uniform which are cheaper than the tuition and books. Between these situations, which will you choose? If you choose to go to college because of the quality education,you are only looking
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into the benefits aspect of opportunity cost, thus you did not consider the cost of the tuition and books whereas when you apply for the job you only pay a little for the application fee. It could also be the other way around wherein you considered the cost only so therefore you chose to get a job you did not enjoy. The short term effect of both situations is different, going to college will give you the education you need and getting a job right away will give you temporary savings, but sadly many people who made decisions like this resulted to them dropping out of college because of insufficient funds and quitting their jobs because of dissatisfaction. In order to avoid this and get the most satisfaction out of a decision, one must take into account both the benefits and the cost and the long term effect. If you foreshadow the long term effect of a certain decision that you are going to make, then it will definitely be easier for you to make the right decisions. If you know that you can study hard to get a good job, then you know that the long term effect of going to college would mean you getting a job, on the other hand, if you know you can't pass college then you can consider taking a job that you have an interest in, the long term effect will be that you will enjoy your job and work efficiently, who knows, one day you might get promoted and get a higher salary.
opportunity cost v.s risk
Not to be confused, risk and opportunity costs are two different things. Risk involves someone gaining or losing something based on the decision he/she has made. This means that there is a chance that the decision might turn for the worse. Opportunity costs on the other hand involves two choices in which a benefit is loss due to the person or company choosing the other choice which entails a different benefit.
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Another issue concerning opportunity cost and scarcity
Let us now discuss opportunity costs in light of the aspect of scarcity. Normally, scarcity occurs when there is a depletion of resources in a company. As resources deplete, companies are pushed into making decisions taking into consideration the opportunity cost of replacing a particular resource for another alternative, this is called trade-offs. An example is the scarcity of rice in the Philippines in which despite having our own rice, the Philippines import rice from Vietnam and other neighboring countries, because the production of rice in the Philippines do not meet the demand of the people. The rice companies in the Philippines made the decision to import rice from other countries as rice is a staple food in the country and therefore it is important to satisfy this need. This is a result of scarcity and thus the opportunity cost of the rice companies' decision is paying less since local farmers are the ones planting the crops and therefore no additional import fee has to be paid. According to the Bureau of Agricultural Statistics, the amount of palay harvested as of the first quarter of 2015 slightly decreased as compared to the palay harvested during the first quarter of 2014. The cause of the decrease was because of the deduction of hectares of farmlands from 2.10M to 2.07M hectares, and as seen in the graph, the production of rice is not stable as this might decrease or increase per year depending on the amount of agricultural fields available. This issue has been around for a long time now, some people even resort to making fake rice to sell. A suggestion to this problem is give more land to farmers for them to produce more rice.
As we can see, the opportunity cost of one's decision may greatly affect the outcome of a choice with different benefits. We see business owners using this aspect to get the most out of a decision, but not only is this aspect of economics useful in studying just economics, but it is actually useful for everything else that we do in our everyday lives. It helps and develops our decision making skills and make us properly and carefully plan out the future that we ought to create with the best possible outcome