Opportunity Cost

One of the most basics concepts in economics is the concept of "opportunity cost". An opportunity cost is a cost you pay when you do something instead of another, and this "cost" is not always, actually most of the time is not, a monetary value. For example, they're selling my favorite cereal in the grocery store near my house, store A, at a higher price than the grocery store on the other side of town, store B, let's say two dollars more. The opportunity cost of not going to store B is two dollars, but the amount of time and gasoline I would waste if I had gone there, which are the opportunity costs of going to store B, are greater costs than two dollars. So, instead, I prefer buying the cereal and give two dollars more than usual.

This problem of opportunity costs comes from the very problem of economics and the reason why a science called economics exists: scarcity. When there are limited resources, and unlimited wants.

Opportunity costs are everywhere in life, and we face them every, single, day.

To park the car in a very, very, small gap in front of the house and spend 15 minutes trying to do it, or to park it 4 meters up the street easily, and walk the way?

The most typical example in economics; to produce 20 tons of butter and 10 million guns, or to produce 5 tons of butter and 40 million guns?(here, the opportunity cost of producing 1 ton of butter is half a million guns).

The reason I have not been writing blog posts for the past six days, I have not been able to play the piano or the guitar, I have not been able to watch the new episode of Supernatural, is, simply, that the opportunity cost of doing these is very, very, big.

Economics tells us and teaches us how the real world works and functions. Not just markets and GDP's and how to lower unemployment rates, but what to do, how to do it, and to do it at what cost. Basically, we answer two of the three basic questions of economics, what to produce and how to produce, in our everyday lives, trying to allocate our own resources as efficiently as we can. Maybe I am not a factory and land owner, and I don't decide, to increase production, let's say, whether to buy 50 million dollars worth more capital and reduce my labor force, or to keep my capital the same and purchase more labor. But what I do, and what everyone does every day is the exact same thing. My "limited resource" is my time, from when I get home from school until I go to bed, my "unlimited wants" are to play the piano, to write blog posts, to watch TV, but also to do my homework and study for the physics test, and the way I allocate may resources is through being organized and trying, although most of the time not succeeding in, time management.

Just to get the concept of opportunity cost clear, here is a thing which happened to me four days ago: It was a Tuesday night, and I had a physics test the next day, but I could also play the guitar and sing at the Art Show hosted at our school, for an hour that night. The opportunity cost of playing the guitar was perhaps and hour of studying physics or an hour of rest, but the satisfaction and the utility I would get from playing the guitar and singing in the Art Show with my friends, would be much, much more valuable than an hour of studying physics. So, I decided to go to the Art Show and study physics when I come back, and thinking back to that Tuesday night, and the test I faced on Wednesday now, I know for certain that I made the right decision, no matter what grade I may get from the test.