Money means choices
By BARBARA TRANQUILLA
© St. Petersburg Times, published November 23, 2000
Do you want to be a millionaire?
Welcome to the world of economics: a study of why and how people respond to an imperfect world of limited resources unable to satisfy everyone's wants. Enough is never enough, so all are forced to make choices.
Money is just a way to keep score for those bidding for goods and services produced by the economy. Land, labor, capital and entrepreneurship are the resources that are used to make products. Those four categories of resources are limited, regardless of the amount of money in the marketplace. Lots of money and limited products just lead to higher prices. Economists call that inflation -- when too much money is chasing too few goods. Prices go up, but quality and quantity of products does not. Giving everyone lots of money doesn't solve the problem.
All economies have limited resources no matter how rich a country is. Because of this problem of scarce resources, people need to make the most of what they have by making choices that best allocate those limited resources of land, labor, capital and entrepreneurship. This problem of scarcity forces us to make decisions. Whenever we make a choice, we gain something and give up something. Whatever we give up is our "next best alternative" and is called our opportunity cost, or what we give up to get something we value more.
For example, suppose you had a nice teacher who offered you a choice of candy -- a mint or a Tootsie Roll. When you choose one item, you give up the opportunity to have the other item. The alternative item becomes the opportunity cost. So, if you chose the Tootsie Roll, the mint was what you gave up -- your opportunity cost.
If you earn $10 and choose to spend it on a movie and soft drink, the afternoon's entertainment cost you $10. But, once you've spent your $10 in this manner, you couldn't use that same $10 to buy a Dixie Chicks CD, your favorite team's T-shirt or flowers for Mom, or even save it for the future.
Sometimes opportunity cost is not measurable in dollars. When you choose to spend time playing with your dog, you forfeit time you could have spent with a friend. When you spend time with a friend, you forfeit time to do homework. An understanding of opportunity cost as it relates to how we use our time is a powerful concept for us to understand.
Opportunity cost is not just a concept that applies to us as individuals. It also applies to our economy. To study this, economists have constructed a model called a Production Possibility Curve (PPC) to illustrate this concept of "you can't have everything, so choices are made." Let us assume that there is an economy that can produce only two products -- tomatoes and fish. Now, let's show what can happen if all resources are used to their maximum efficiency.
Graph units of tomatoes on the y axis and units of fish on the x axis and identify the coordinate points with letters. Below is a table of the economy's production capacity using all resources to maximum efficiency. A graph can illustrate the table of two variables.
Let's interpret the graph. This economy can produce all fish and have four units of fish and no tomatoes, or no fish and 10 units of tomatoes. Or it can produce any combination along the production possibility curve.
What it doesn't tell us is the money cost to produce fish or tomatoes, or the value of fish and tomatoes in the marketplace. It doesn't tell what should be produced, only the possible combinations, the opportunity costs associated with all production choices, and the maximum amounts of production.
Also, it shows us that to get more of one item, we have to give up some of the other item. For example, assume our economy initially prefers producing one unit of fish and nine units of tomatoes, then shifts to prefer more fish. Since our productive resources are limited, the only way we can get more fish is to produce fewer tomatoes. This also is an important economic concept for us to understand: When we want more of one item, we must give up some of the other item.
Now, let's see how we can apply these concepts in our own lives by answering the following questions:
-- If I choose to spend all my allowance on a movie ticket, what are the other things I will not be able to buy? These other items are my opportunity costs.
-- If my parents choose to pay someone to mow their lawn or clean their house, what are they giving up? What are they gaining? How does this illustrate opportunity cost?
-- If I choose to go shopping rather than study for an exam, what is the opportunity cost?
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-- Barbara Tranquilla is a longtime teacher of economics in the Dade County public school system. She has won numerous state and national economics teaching awards and in 1995 was the first to be named Florida Economics Educator of the Year by the Florida Council on Economic Education.
About the Florida Council on Economic Education
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