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Economic Principles

Economic Principles

Trade-Offs and Opportunity Costs

In practice, economists tend not to talk about early birds and greener grasses.  They've developed their own more technical vocabulary to describe the world of scarcity and choice. 

For example, when we sacrifice one thing to obtain another, that's called a trade-off. Only have enough cash to buy a bike or a snowboard, but not both?  That's a trade-off.  Trying to decide whether to take the Fourth of July off to spend with your family, or to go to work and make extra overtime?  That's a trade-off.

Trade-offs create opportunity costs, one of the most important concepts in economics.  Whenever you make a trade-off, the thing that you do not choose is your opportunity cost.  To butcher the poet Robert Frost, opportunity cost is the path not taken (and that makes all the difference).  You bought that bike? Then the snowboard was your opportunity cost.  Decided to work on the Fourth of July? Your opportunity cost was a relaxing day hanging out with the fam at the BBQ.

Everything has opportunity costs.  If you just bought something, you could have always chosen to buy something else instead.  If you just chose to spend your time in a particular way, you could have always done something else.  "Something else" is your opportunity cost.

Why It Matters Today

Sometimes opportunity costs can vastly exceed the sticker price of an item. Imagine you scored a ticket to the Super Bowl. You paid $200 for your ticket, a stretch for your budget but worth it for a once-in-a-lifetime opportunity. You sit down in your seat next to some schmuck who admits he paid $5000 to a scalper for his ticket. Five grand! That's madness.

But hold on. Your ticket just cost you five grand, too, even though only $200 in cash ever left your wallet. How's that work? Well, if the schmuck next to you was willing to buy a seat for $5000, then you could have sold yours at that price, too. The opportunity cost of you using your ticket is the five grand you didn't make by scalping it.

Hope it was a good game!

Sometimes, a Song Says it Better: Should I Stay or Should I Go, by The Clash

This is classic opportunity cost (trade-off) analysis – should I do something or not?

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