Considering Opportunity Costs

Being aware of tradeoffs and their resulting opportunity costs is vital in making economic decisions at all levels. Whether they are aware of it or not, individuals and families make trade-offs every day. Businesses must consider trade-offs and opportunity costs when they choose to invest funds or hire workers to produce one good rather than another.

Consider an example at the national level. Suppose Congress approves $220 billion to finance new highways. Congress could have voted instead for increased spending on medical research. The opportunity cost of building new highways, then, is less medical research.

Production Possibilities Curve

A production possibilities curve shows the maximum combinations of goods and services that can be produced with a given amount of resources.

Economics & You

Imagine that you are taking two classes— economics and math. You can spend 10 hours per week studying. How will you decide how many hours to study for each subject? Read on to learn how a production possibilities curve helps people make such decisions.

Obviously, many businesses produce more than one type of product. An automobile company, for example, may manufacture several makes of cars per plant in a given year. What this means is that the company produces combinations of goods, which results in an opportunity cost.

Economists use a model called the production possibilities curve to show the maximum combinations of goods and services that can be produced from a fixed amount of resources in a given period of time. This curve can help determine how much of each item to produce, thus revealing the trade-offs and opportunity costs involved in each decision.

Text 3. Market and Command Economies

Economics is a science that analyses what, how, and for whom society produces. The central economic problem is to reconcile the conflict between people’s unlimited demands with society’s ability to produce goods and services.

In industrial Western countries markets are to allocate resources. The market is the process by which production and consumption are coordinated through prices.

In command economy, a central planning office makes decisions on what, how, and for whom to produce. Economy cannot rely entirely on command, but there was extensive planning in many Soviet bloc countries.

A free market economy has no government intervention. Resources are allocated entirely through markets.

Modern economies in the West are mixed and rely mainly on the market but with a large dose of government intervention. The optimal level of government intervention remains a problem which is of interest to economists.

The degree of government restrictions differ greatly between countries that have command economies and countries that have free market economies. In the former, resources are allocated by central government planning. In the latter, there is not any governmental regulation of the consumption, production, and exchange of goods. Between the two main types lies the mixed economy where market and government are both of importance.

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The free market allows individuals to produce goods and services without any government restrictions. The command economy allows little individual economic freedom since most decisions are made by the government. Between these two extremes lies the mixed economy.

In a mixed economy the government and private sector co-operate in solving economic problems. The government controls production through taxation and orders for goods and services for the army, the police force, administration and other needs.