Why we have to choose
You can’t have everything you want. Neither can families, businesses or governments. That’s because of scarcity: there aren’t enough resources like money, time, land or workers to satisfy everyone’s wants.
Because of scarcity, every person must make choices.
Every choice has a cost
When you choose one thing, you give up something else. Economists call the value of the next-best option you give up the opportunity cost.
Example: You have $10. You can buy a book or go to the movies, but not both. You choose the book. Your opportunity cost is the movie.
Opportunity cost isn’t always money. It can be time, too.
Example: On Saturday afternoon, you can play soccer or go swimming. You choose soccer. Your opportunity cost is swimming.
Trade-offs
A trade-off means giving up some of one thing to get more of another. Most choices involve trade-offs.
- Staying up late to watch a movie → less sleep
- Spending money on a toy now → less money saved for a bike
- Spending more time on homework → less time to play
Costs and benefits
Smart decision-makers compare costs and benefits.
- A benefit is what you gain.
- A cost is what you give up: money, time, effort or another option.
| Choice | Benefits | Costs |
|---|---|---|
| Buy a new video game | fun, play with friends | $40; can’t save for a bike |
| Save money for a bike | get a bike in a few months; exercise | have to wait; no new game now |
A decision-making model
- Identify the choice you need to make.
- List your options.
- Think about the benefits and costs of each.
- Choose the best option.
- Name your opportunity cost: the next-best option you gave up.
Example: How should Sam spend $20?
| Option | Benefits | Costs |
|---|---|---|
| A new skateboard wheel set | faster skating | uses all $20 |
| Movie and popcorn with friends | fun time with friends | uses $18; nothing lasting |
| Save it | closer to buying a new bike | no fun purchase now |
Sam chooses to save. His opportunity cost is the next-best choice, perhaps the movie with friends.
Choices families, businesses and governments make
Families
A family may choose between a vacation and new furniture, or between a bigger home and living closer to work.
Businesses
A bakery may choose between making more cookies or more bread, or between buying a new oven and hiring another worker.
Governments
A town council with limited money may choose between building a new library or fixing roads. If it builds the library, the opportunity cost is the road repairs it couldn’t afford.
Thinking ahead
Some choices give a small benefit now; others give a bigger benefit later. Saving money, studying, and practising a skill often have costs now but benefits in the future.
Try it yourself
- Think of a choice you made today. What was your opportunity cost?
- You have $15 and three options: a book ($12), a puzzle ($15), or saving. Use the decision-making model to choose.
- Pretend your class has money for one thing: a field trip or new sports equipment. Debate the costs and benefits and vote.
- Interview a grown-up about a hard choice they made. What did they give up?
Quick recap
- Scarcity means we can’t have everything, so we must make choices.
- Opportunity cost is the next-best option you give up.
- Choices involve trade-offs between costs and benefits.
- A decision-making model helps make smart choices.
- Families, businesses and governments all face opportunity costs.