Wednesday, May 6, 2009

Concept I: Opportunity Cost

Opportunity cost is the most important concept in economics - being the most fundamental.

Take any resource - land or natural resources.

The environmentalist would think of the rainforest or the ozone layer.

The Classical Economists do not allow you to take money because money is considered a "veil" which covers the real stuff. But the modern person would think of money as a resource - and herein lies his misery.

And I would add "time" - because without it, the game is over for life as we know it.

The idea behind the concept of the "opportunity cost" is that there is a cost to the opportunity for using that a particular quantity of the resource.

A particular quantity because if you have, say, a lump of coal and you burn it, then that lump of coal is no more.

You have used up the opportunity for using that lump of coal for some other purpose - such as for drawing - because you have used up the lump of coal for burning - in order to cook, for example.

Ah, you say, but there is more coal where it comes from, so there is nothing to worry about.

But the economist would say - given that you have the lump of coal now - however you are going to make use of that lump of coal, you are going to deprive yourself of the opportunity of using that lump of coal for some other purpose.

That some other purpose is the opportunity cost of burning that lump of coal.

If there are two uses A and B for a resource R, the opportunity cost of using R for A is B and the opportunity cost of using R for B is A.


1. The opportunity cost of blogging is family bonding - because you are too intent on writing.

2. The opportunity cost of making money is living the life you want it - you may have been a good child to your parents by passing exams and getting a job and a family and have foregone your dream of being a blues guitarist or a cartoonist.

3. The opportunity cost of having ebony furniture is global warming - because you have caused old rainforest trees to be chopped down for exports.

4. The opportunity cost of living is the happiness you have dreamt of and never enjoyed - because you have followed a routine or a way of life which has been set by social convention or by the mainstream economic system that you do not appreciate.

In other words, there is a cost to everything you do.

So you have to make sure that the things you do are really the things you really want to do.

For society as a whole, the implications of opportunity cost are:

1. The opportunity cost of politicking is peace and harmony.

2. The opportunity cost of building the national car is industrial innovation which our young people are good at.

3. The opportunity cost of bailout is the macroeconomic adjustment in all major local markets.

4. The opportunity cost of consumerism is a simple and contented life - because of the time spent shopping for happiness rather than be happy with what we already have.

1 comment:

Anonymous said...

This is a very informational post. I particularly like the statement of the cost of consumerism.