One of the simple facts of life is also the first lesson in every Economics course around the world: We greedy humans have unlimited wants, which means that no matter how much we have, we want more. It’s in our DNA. We’re greedy and we’re lazy and that’s why the human is the most successful animal on Earth. We wake up every day and we’re DNA-wired to get more.
At the same time, we also face limited resources. Resources are the natural things like coal and oil and trees and fresh air… There are other resources too, like bulldozers, buildings and iPhones… they’re the stuff we want to make ourselves happier. And because we’re humans we want maximum happiness and no matter how much we have, we want more.
Opportunity cost is what Econimics calls the ‘real cost’ of buying/using anything, even time. If we have $200,000 in our bank account and we buy a Range Rover, we can’t buy a house. If we have a monthly income of $3,000 and we spend it all on phone repayments, car repayments, mortgage repayments, groceries, utilities…, we’ll not have enough to also buy a 2 week holiday in Fiji. See? We can’t have everything. And if we have a higher income, yes, we can have all of that, but because we’re humans, we’ll want more. Instead of Fiji, we’ll want a holiday in the Maldives, or New York, or Iceland. Instead of a simple 2 bedroom house in a comfy suburb, we’ll want a 4 bedroom house in a posh neighbourhood and instead of a car we’ll want an SUV… and when we buy that SUV, guess what, we’ll want more. And when you’re really really rich, you’ll want a private helicopter, and guess what? You’ll still want more. The real (opportunity) cost of the SUV is maybe the 2 week holiday in Paris that you can’t have.
Opportunity costs is the loss of the next best alternative. If we choose a trip to Stewart Island, we can’t buy a new MacBook Pro. See, it’s a fact of life. LIke gravity and evolution; not wishy washy things, real facts.
Opp cost applies to individuals, businesses, and governments. If a government has limited income from taxes and it wants new hospitals, more schools, higher salaries for GPs so that more people can get immediate appointments, new air force helicopters… the Government can’t have everything either. And if we spend millions on writers, artists and singers, we can’t spend those millions on new helicopters or new classrooms. If the government spends millions on Pharmac funding, then maybe it can’t give millions to up & coming beat boxers. If the Government spends money buying school stduents’ lunches, that money can’t be used to buy blood cancer drugs.
We can’t have everything we want. There’s no such thing as free anything – they’re not free lunches, they’re not free drugs, they’re not ‘three free GP visits’, because someone pays and when money is spent on these, that money can’t be spent on something else.
The REALLY tough part of Economics is deciding which of the many wants gets the top priority? We’re all different and what I would choose to spend money on is very likely to be different to what you would spend money on – BUT opportunity costs is real for all of us.
eN-Zed 