Page 248 - Encyclopedia of Business and Finance

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Economics

are used to produce natural or chemical fertilizers, but to help someone clean a garage. If the person offers to pay
they are necessary for crop production. Water might be the student $50 to clean the garage and the student
used to irrigate the crop and enhance production. When chooses to study, the opportunity cost is easily measured
the crop is ready for harvest, the farmer uses additional at $50. In both these examples, opportunity cost is
resources to complete the process—equipment, gasoline, directly related to what was given up, not any other bene-
labor, and so on—which results in a good that can be used fits that might result from the decision.
or sold for use by others. Circumstances also play a role in opportunity cost.
Services are provided in numerous ways and are an Sometimes people are forced into a decision because of
intangible activity. There is no doubt that one can often circumstances and the results may not always be optimal.
see someone providing a service, but the service is not For example, if someone is planning to relocate to a new
something that someone can pick up and take home to city to start a new job and wants to sell a house before the
use. An example of a service is a ride in a taxi through a move in order to be able to purchase a new house in the
crowded city. It takes resources for the owner or driver to new location, the person may sell the house for less than
provide the service, and a passenger is consciously aware the market price in order to complete the process. The
of riding in a taxi. When the ride is completed and the opportunity cost is the value of what was given up in
provider has been paid, the passenger does not have any- order to be able to purchase a new home. Every time a
thing tangible to hold except the receipt. However, choice is made, opportunity costs are assumed.
resources have been used to provide the service. The auto-
mobile used as the cab, the fuel used to operate the cab, Production. Another economic choice that must be made
and the labor of the driver are all examples of resources is related to production. This is illustrated in Figure 1. All
being used to provide a service that will satisfy a want. four of the decisions must be made: What goods will be
It is important to understand that because goods and produced? How will production occur? How much
services utilize resources that are limited, goods and serv- should be produced? Who will be the recipients? All are
ices are also scarce. Scarcity results when the demand for decisions that influence production efficiency.
a good or service is greater than its supply. Remember that Efficiency is the primary element in deciding what to
society has unlimited wants but scarce resources. It is produce and how to go about the production process.
scarcity, then, that causes consumers to have to make Efficiency is producing with the least amount of expense,
choices. If individuals cannot have everything they want, effort, and waste, but not without cost. If you take some-
they must decide which of the goods and services are most thing away from a person to satisfy another person, one
important and which they can do without. will be less happy and the other will be more happy. If a
way can be found to make one person more happy with-
out making the other person less happy, this would be effi-
ECONOMIC CHOICE
cient.
Opportunity Cost. When one makes economic decisions, An example of economic efficiency might be the fol-
it is because of limited resources. Alternatives must be lowing. Assume someone owns a car and a friend does not
considered. People make such decisions based on expect- own a car but does drive. The friend needs transportation
ing greater benefits from one alternative than another. regularly for a week. It happens to be a time when the car
There is an opportunity cost involved in the choice. owner will be away on a business trip and therefore will
Opportunity cost is the benefit forgone from the best not be using the car. It makes no sense for the friend to
alternative that is not selected: individuals give up an buy a car to use for such a short period of time, so the
opportunity to use or enjoy something in order to select owner loans the friend the car for that week. The car
something else. owner is no worse off and the friend is better off. Eco-
Opportunity costs cannot always be measured, nomic efficiency has occurred in this situation. If the car
because it might be satisfaction that is lost. At other times, owner had not loaned the car to the friend, there would
however, opportunity cost can be measured. Here are have been waste because the friend would have had to buy
examples of each. Perhaps a student is studying hard for a or rent a car. It is wasteful to fail to take advantage of
final examination in a difficult course because a good opportunities in which there is no loss of satisfaction to
exam score is critical to achieve the desired grade. Friends either party.
call to invite the student out for the evening. The alterna- Production efficiency is a situation in which it is not
tives are to study or to have fun. Being wise, the student possible to produce any more units of a good without giv-
selects studying instead of going out. It is difficult to ing up the opportunity to produce another good unless a
measure the opportunity cost of having fun with friends. change occurs in available productive resources. If a
In the second example, the same studying student is asked farmer is growing wheat to be sold for the production of

ENCYCLOPEDIA OF BUSINESS AND FINANCE, SECOND EDITION 225