20602_AC_Economics_and_buisness_Year_6_Making_choices_about_resources

Trade-offs and the cost of lost opportunities – 1
What are your favourite things to do? Maybe
you like to play football or attend dancing
lessons. Perhaps you are an avid reader or
you just like chatting on the phone.
The moment you choose any of these
things, you are making a decision about how
to spend your time. You are giving up one
thing so you can do something else. For
example, if you decide to chat on the phone,
you might be giving up the opportunity to
finish your homework. (No-one said that an
alternative had to be something fun!) Most
decisions we make involve trade-offs. A
trade-off is made when you trade in or swap
one thing to gain another. This can have
positive or negative results. In the example
above, trading off the opportunity to do your
homework might result in a poorer mark in
your school report.
There may be many alternatives to
something you choose, but there is always
one ‘next best’ alternative. In economics, the
value of the next best alternative is called
opportunity cost. In other words, in making
choices and trade-offs, you are paying the
cost of a lost opportunity.
To give another example, let’s say you are
keen to start two activities—Scouts and
soccer training. But to your dismay, they are
held on the same night in your local area.
You must choose one or the other, so you
have to make a trade-off. You decide to
choose Scouts. The opportunity cost is the
enjoyment and value you might have had
from the soccer training—and perhaps even
the chance to try out for a community soccer
team. Of course, choosing Scouts will have
advantages too—you might make a good
friend or learn outdoor skills.
choosing between alternatives. It is important
to remember that when you buy something,
the opportunity cost is the value of the next
best alternative—not the cost of the product.
For example, if you choose to spend $5 on
a pie rather than a sandwich for lunch, the
opportunity cost is the enjoyment of eating
the sandwich (not the $5). For a business
owner who decides to purchase pianos over
electronic keyboards for his music school,
the opportunity cost is the technology the
keyboards could have offered, not their price
tag.
Opportunity cost in business relates to
decisions made about human, capital
and natural resources. For example, if a
department store decides to employ younger
sales assistants over older sales assistants,
the opportunity cost is the experience and
knowledge of the older staff. If a construction
company decides to buy its equipment
rather than rent it, the opportunity cost is the
chance to use new and reliable equipment.
If a carpet cleaning business decides to use
chemical-based products rather than natural
ones, the opportunity cost could be water
pollution.
The most important thing to remember
is that every choice people make as
consumers and business owners has an
opportunity cost—and these can have a great
impact on our lives.
The concept of opportunity cost can also
be seen at work in business settings, for
both consumers and business owners. As
a consumer, you must constantly decide
how to spend your money, which means
R.I.C. Publications ® www.ricpublications.com.au Australian Curriculum Economics and business (Year 6) 3