Because of resource scarcity, economic agents must make choices. Making choices not only applies to consumers but also businesses and governments.
We have to make choices about the money and time we have. What items should we choose? How much money should we save? How to divide time between family and work?
Businesses must decide how to meet the needs and desires of consumers with existing resources. They must decide:
- Types of products and services what to produce
- How to produce it efficiently
- How to distribute them to consumers
Why do we have to make choices
Choice arises as a result of economic scarcity. Scarcity occurs because finite economic resources must meet our infinite needs and wants.
Making choices involves trade-offs. In other words, if we choose something, we sacrifice others. If you have money to buy sports shoes, you might have to decide between Nike or Adidas. You cannot buy both because your money (resources) is not enough. And you have to choose one.
Such a situation also applies to other economic resources, such as natural resources, capital, labor, and even time.
I will give you three examples of economic choices.
Leisure or work. You have to decide whether to spend more leisure to have fun or work. If you have more time to have fun, you sacrifice opportunities to get more money. But you are happier.
And, if you work more, you have less free time. You are unhappy and even stressed by being a workaholic. But, more work means more money you get.
Such situations also apply to the time you spend working or studying. College doesn’t bring money, even you have to bear the costs. But, by taking it, your skills and knowledge increase.
Renting or buying an apartment. Buying an apartment is a wish. But that is not the right choice if you do not have enough money. You might prefer to rent an apartment. And, conversely, if you have enough money, buying an apartment might be a better option, depending on your wishes.
Public transportation or private vehicles. Driving your car makes you more time to do personal things than take public transit. But, you have to bear the higher costs.
And, if you take public transportation, you save more costs. But, you do not get much satisfaction as when you drive your car.
Making choices involves opportunity costs
From the example above, you can see each of your decision; it requires something that you sacrifice. In economics, the cost of sacrifice refers to the opportunity cost, more precisely, the next best alternative you sacrifice when choosing something.
Each choice involves a level of risk. You must, of course, have to consider the costs and benefits of the decision, not only the current costs and benefits but also the future.
Why it is important
The choice is something that often arises in our daily lives. You need to analyze the problem, calculate the costs, and benefits before making a decision. You need to assess various aspects to make the right decision.
Making the right decision makes your life better and a higher standard of living. You might sacrifice some time for college and forgo the opportunity to earn money by working. But, with college, you get better knowledge and skills. After graduating, you can get a high-paying job to compensate for the opportunity costs (money) lost during college.
To assess whether the four-years college has the right decision, you need to compare the benefits and costs. You need to calculate the tuition fees plus opportunity costs (the potential money you earn by working). And compare it with at least your total salary for four years.
What to read next
- Economic Problem: Definition and 3 Basic Questions
- Scarcity in Economics: Meaning and Explanation
- Economic Resources: Definition, Types
- Needs: Definition, Example, Type
- Wants: Definition and Examples
- Choices in economic: Meaning, Importance, Reasons
- Opportunity Cost: Meaning, Importance, Examples
- Economic Efficiency: Meaning, Prerequisites, Why It Matters
- How are Economic Resources Allocated?
- Why Are Economic Resources Scarce?
- Why is Money Not an Economic Resource?
- Does Scarcity Only Work For The Poor? What Causes Scarcity?
- What Are the Consequences of Scarcity in Economics?
- Three Basic Economic Questions and Resource Allocation
