The basic economic problem is the issue of scarcity. Because resources are scarce but wants are unlimited, people must make choices. This lesson showcases the most important concept in macro-economics, which is the concept of opportunity cost.
Very simply, everyone has the same amount of hours in a day but we all make different decisions about what we do, what we choose to buy, how we spend our time. What determines these choices, opportunity cost does.
Every time you make a choice, there's a certain value you place on that choice. You might not know it or think about it but every choice has a value to you and when you choose one thing over another you are saying to yourself, "I value this more than another choice I had."
Now the opportunity cost of a choice is what you gave up to get it. If you have two choices, either an apple or an orange, and you choose the apple, then your opportunity cost is the orange you chould have chosen but did't. You gave up the opportunity to take the orange in order to choose the apple.
In this way the opportunity cost is the value of the opportunity lost. Value has 2 parts to it. It has benefits as well as cost. If you choose an apple over an orange, maybe the apple cost less but maybe you enjoy it more.
So looking at choice in terms of benefit and cost helps you make better economic decisions. To make a good economic decision, we want to choose the option with the greatest benefit to us but the lowest cost. For example, if we graduate from college and suddenly we find ourselves in the job market there are choices to be made.
And let's say that two jobs become available to us. We can either work for Company A or Company B. Now the job with company A promises to pay us $20 an hour while company B promises to pay us $10. Based on this information alone, of course, most people would choose company A.
Because they're paying a higher salary, but when you look at this kind of choice in only dollar terms, then you're only seeing it from the perspective of the benefits. Now let's take that same example but now we discover that the job with company A requires a dress suit that'll cost you $1500.
You realize the job with the higher salary may not be worth it to you, now you're starting to think economically. You're thinking economically when you look at a choice through the eyes of the benefits and the cost. Whatever we choose, the opportunity cost is the value of the choice we could have had. The opportunity cost of working for company A is the value of what we gave up.