When making any decision, decision makers should consider the opportunity costs of each possibility.ģ.Definition of opportunity cost: whatever must be given up in order to obtain some item next best alternative forgone.This is called opportunity cost of resource.
…seeing a movie is not just the price of the ticket, but the value of the time you spend in the theater.…going to college for a year is not just the tuition, books, and fees, but also the foregone wages.Because people face trade-offs, making decisions requires comparing the costs and benefits of alternative courses of action.The cost of something is what you give up to get it Edit Recognizing that trade-offs exist does not indicate what decisions should or will be made.Ģ.Another Example is “ guns and butter”: The more we spend on national defense(guns) to protect our borders, the less we can spend on consumer goods (butter) to raise our standard of living at home.This implies that the cost of this increased equality is a reduction in the efficient use of our resources.For example, tax paid by wealthy people and then distributed to poor may improve equity but lower the incentive for hard work and therefore reduce the level of output produced by our resources.Definition of equity: the property of distributing economic prosperity fairly among the members of society.Definition of efficiency: the property of society getting the maximum benefits from its scarce resources.A special example of a trade-off is the trade-off between efficiency and equality.Examples include how students spend their time, how a family decides to spend its income, how the government spends revenue, and how regulations may protect the environment at a cost to firm owners.
“There is no such thing as a free lunch (TINSTAAFL).” Making decisions requires trading one goal for another.