Essay 1 – Opportunity Costs
Introduction
The basic economic problem that every society faces is the fact that resources – often called The Factors of Production are not sufficient to satisfy everything society would like to have. Thomas Sowell, a renowned economist said, “The first lesson of economics is scarcity: there is never enough of anything to fully satisfy all those who want it.” (Sowell, 1993, p. 131). This statement implies that to get one thing we like, we usually have to give up another thing that we like. Paul Samuelson, America’s first Nobel Prize winner for economics, is credited with providing the first clear explanation of the economic problem. He argued that in order to solve the problem of scarcity, societies must answer three basic questions:
What to produce?
How to produce it?
For whom it should be produced?
Firms produce goods and services, but what they produce and the quantity produced is largely determined by the needs and wants of consumers. Firms make decisions with respect to how goods and services are produced. In making these decisions, firms are faced with the decision of how to combine factors of production to produce goods and services. For example, one of the decisions firms are frequently confronted with is the decision as to whether to use labor-intensive or capital-intensive methods of production. Finally, decisions on who will receive the goods or services produced will depend, to a large extent, on the distribution of income in the economy. Individuals with the highest incomes, for example, will have the ability to buy the most goods and services and, therefore, may have many goods and services produced for them.
Essay 1 – Opportunity Costs
Important trade-off made recently:
In the world, the wants of the people are unlimited but the resources available are limited, that is, the supply of opportunities, money, time, goods, and services is limited. This concept of scarcity in economics leads to a concept of trade-off, which takes place as a situational decision when a choice has to be made by an individual or a group of individuals which will benefit them, and to do that the individual or group of individuals has to give up on something that has a value. Recently, I had to decide on my online business. I had to choose between buying from merchandise wholesale or buying from estate sales. If I decided of buying from merchandise wholesale, I had to face the trade-off of buying from real estate sales. On the other hand, if I decided of buying from real estate sales, I had to face the trade-off of buying from the merchandise wholesale. Another important trade-off I faced was deciding on the amount of time to spend on this course and the amount of time to spend on doing the household chores.
The opportunity cost associated with the trade-off:
The concept of the opportunity cost is foregoing the benefit or value of an option that could have been acquired if there was engagement in the activity in comparison to the engagement of an alternative option from which the offered return in benefit or value is higher (Fagan, 2020). For the first important decision I made, I chose to buy from estate sales from which I could acquire unique and homogenous items. The opportunity cost associated with this trade-off is the amount that would have been foregone if the decision was made on buying from the merchandise wholesale. I was able to acquire more items of high quality for a lesser amount of money than purchasing items wholesale since goods or products in the estate sales are of high quality and are sold at reasonable prices (Taylor, 2018). On the other hand, choosing on doing the household chores over spending time to learn the concepts from this course would have the opportunity cost of the loss of time spent on gaining knowledge from this course. On the other hand, the opportunity cost of learning concepts from this course is the loss of time spent on doing household chores.
Steps that were taken to integrate the concept of cost-benefit analysis in the decision-making process to arrive at the most cost-effective and efficient choice:
The decision on which option to choose so that the choice will be the most efficient and cost-effective is taken through the cost-benefit analysis of the available choices. The process through which the measurement of the benefits of the decision or option chosen and the cost associated with the decision-making is done is regarded as the cost-benefit analysis. The steps which are taken to analyze the cost and benefit of a decision-making process are such as specifying the available options to choose from, calculating the cost and benefit, and whether the net benefit of each option is positive or negative based on the net benefit of the options choosing the most efficient and cost-effective option (Stobierski, 2019). For the first case, I calculated the total money to be spent on buying merchandise wholesale and the quality of the items which I will receive in return. Similarly, the steps were followed accordingly for buying from real estate sales. I concluded that purchasing from real estate sales would result in acquiring high-quality products at lesser prices when compared to purchasing from merchandise wholesale. The most cost-effective and efficient choice seemed to be buying from real estate sales and hence I did that accordingly. For the second case, I analyzed and predicted the future value of the time spent doing household chores and time spent learning concepts from this course. I came down to the conclusion that it would be beneficial to spend less time doing household chores and more time learning concepts of Economics from this course since I can apply this in my online business and earn more revenue in the future. Hence, the dollar value and benefit of spending time on learning Economic concepts was the most cost-effective and efficient choice among the two options.
References:
Fagan, D. (2020, January 29). Real-Life Examples of Opportunity Cost. Federal Reserve Bank of St. Louis. Retrieved March 17, 2022, from https://www.stlouisfed.org/open-vault/2020/january/real-life-examples-opportunity-cost
Stobierski, T. (2019, September 5). HOW TO DO A COST-BENEFIT ANALYSIS & WHY IT’S IMPORTANT. Harvard Business School Online. Retrieved March 25, 2022, from https://online.hbs.edu/blog/post/cost-benefit-analysis
Taylor, A. B. (2018, August 21). 9 Best Things to Buy at an Estate Sale. Kiplinger. Retrieved March 25, 2022, from https://www.kiplinger.com/slideshow/spending/t037-s001-best-things-to-buy-at-an-estate-sale/index.html
