1

St. Scholastica’s Academy

Tabunok, Talisay City, Cebu
SY 2020-2021

Embracing differences, Uniting Benedictine Youth in Christ

Focus: Community and Discipline

Name:________________________________________Grade and Section:_____________

Subject: Applied Economics -Grade XII ABM Teacher: Myrna A. Monares
Contact #: 09233527379
Facebook: Jo Yang
Gmail: [email protected]

Lesson 2: Opportunity Cost and Resource Allocation

Objectives:

 Identify the cost of any choices you make

 Analyze that opportunity cost when making out our choices as individuals and as society
 Differentiate the methods of allocating society’s resources, how markets allocates resources , role of the entrepreneur
in a market economy and resource allocation in the Phils.

A. Introduction

Count the costs and divide up

What does it cost you to see a two-hour movie? If you are thinking of “cost” as the money you must pay for a movie ticket,
then you are leaving out a lot. Economics would encourage you to consider everything you must give before deciding to go
to a movie. And since each time you choose to do something, you also choose not to do many other things you could be
doing, you must find some way of diving up or allocating your scarce resources among different activities.

The Cost of Any Choice We Make

We have establish in the previous chapter that scarcity requires people to make choices and every choice inloves trading
off one thing for another. Consider your own situation. Because your own resources money and time are scarce, each time
you choose to do something, you also choose not to do something else. For example, when you choose to see a movie, you
choose to use your money to buy a movie ticket and not busy something else. You also choose to use your time to see a
movie and not do something else.
When you choose to use your money o buy a movie ticket, you give up the opportunity to buy something else that you
value perhaps a book or a new pair of socks. And when you choose to use your time to see a movie, you give up the
opportunity to do something else that you value perhaps exercising or studying for an upcoming exams.
So the true cost to you seeing a movie is the value you place on what you would otherwise have been able to obtain with
your money and time. This cost is called the opportunity cost of the choice because you give up the opportunity to obtain
other things that you value. As long as you have alternative uses for your money and time, an opportunity cost is incurred
every time you use your money and time to do something.

B. Lesson Proper

The opportunity cost of any choices we make is the value we place on on the best opportunity that will have be
given up if that action is taken.
If an action requires the sacrefice of a valuable opportunity, then it costs something to take the action. We hasten to add
that only individual taking the action can identify the most attractive opportunity sacrified. Opportunity cost is subjective; it
depends on the perpective of the person taking the action.

Trade-offs Do not Have to be “All or Nothing”

A choice is a trade off exchanging one thing for something else or exchanging more of one thing for less of something else.
So far we have considered only choices about whether we should or should not do something. For example, you make a
 2

choice abouh whether you should or should not see a movie. You also make a choice about whether you should or should
not this chapter.
Economists however argue that many choices are “made at margin.” That is to say, many choices are about to do a little
more or a little less of something. For example, you make a choice about whether you should read his chapter for another
hour after you have already spent, say, one hour reading it . In this case, you o not think about the total (opportunity) cost of
reading this chapter. Rather, you think about the “ marginal” (opportunity) cost of reading for another hour.

Opportunity Cost and Individual Choices

Opportunity cost is the one we must consider when making our own decisions.
Should yo take the boat or should you take the plane when you want to travel from Cebu City to Manila? Which is less
costly to you? You will have to ask about the value of the time you give up when you take the boat as well as the value of
the money you give up when you decide to take the plane.
Shoud you attend birthday party or not? First, you might have to spend some money tp attend. You will have to ask
about the value of the other things you could have bought with that money. Second, you might have to spend three or four
hours at the party. You will have to ask about the value of the things you could have done with that time.
So you must weight the value you place on the fun you may have at the birthday party against tha value you place on
what you might otherwise do with your money and time. In the end, you might still decided to attend the birthday party, but
recognizing the opportunity costs will increase your chances of making a good decisions.
Opportunity costs is the one we must consider when analyzing the decisions of others. Economists believe that the
relevant cost of taking any action the only kind of cost that affects decisions is the opportunity cost. This is what economists
remember when they analyzethe behavior of individuals and business firms:
The higher the opportunity cost of doing something, the less likely it will be done.
The lower the opportunity cost of doing something, the more likely it will be done.
Which classes are you more likely to miss?The opportunity cost of missing a class in which an exam well be gevin is
high. You are not likely to miss this class. Meanwhile, the opportunity cost of missing a class which no exam will be given
and the teacher will be discussing a topic you already know well is probably low. You are more likely to miss this class.

Economics in Action
Opportunity Cost and Business Opportunities
Many entrepreneurs, perhaps without then realizing it, make use of the idea of opportunity costs when anticipating what
products will be profitable to produce in the futur. For example, the rise in the opportunity cost of preparing home cooked
meals affected eating patterns, stimulating entrepreneurs to think about new products and new technology.
Preparing meals “from scratch” requires a lot of time. Time is a valuable commodity for two worker families families in which
both husband and wife work. A natural result of the growth of the two-worker family was shift toward time-saving ways to
prepare meals. There’s money to be made in descovering time-savig solutions making meals. This has stimulated some
entrepreneurs to offer frozen foods and microwave ovens in the market. All in all, the opportunity cost of doing houseworkis
rising . Devixes such as a robotic vacuum cleaner are being developed in response to higher opportunity cost of doing
housework. And entrepreneurs continue to lookfor areas in which opportunity cost is rising to get some ideas about new
products and new technology. There’s money to be made in being able to understand how changes in opportunity cost
affect people’s buying patterns.

Opportunity Cost and Social Choices

Better education for all filipinos is a goal that we can all agree on. Greater acces to good schools would be needed to achive
this goal. These, in turn, wuld require more and better-trained teachers (labor and human capital), and more school buildings
and equipment (physical capital). In order to improve philippine education, we would have to shift resources land, labor,
capital, and entrepreneurship away from producing other things that we also want. We would have better education, but
fewer health care services, or other good and services that would otherwise have been produced. The opportunity cost of
improved education, then, is the value society places on those other goods and services we would have to do without.
Public discussions and debates about government actions suffer when opportunity cost is ignored. People like to cleim that
a certain service is “ a basic rigth” or some commodity is “ a necessity of life” and then proceed to propose a change in
circumstances that is to their advantage. A major contribution of economics courses is to keep opportunity cost part of public
discussions and debaes. One goal of economics courses is to help you uncover unwarranted conclusions drawn from simple
“truth”.

Education is “ a Basic Right “

“Kindergarten through 12th grade education is free. So a college education should also be free and guaranteed to every
filipino. “We can analyze this statement using the concepts discussed in this chapter.
“There is no such thing as a free lunch” is a famous remark by the nobel prize winning economist Milton Friedman. This
remark expresses the idea that opportunity costs are incurred when governments provide goods and services free of charge
to consumers. Society uses up resources went into the preparation and servinf of the meal the labor and materials could
have been used in other ways.
 3

Water Is “ a Necessity of life “

“People need water. Its price must be kept very low.” We can also analyze this statement using the concepts discussed in
this chapter.
When the pricr of water is very low, people drink water, use much water brushing their teeth, and take long showers.
When water becomes more expensive, people drink water , use less water brushing their teeth, and take shorter showers.
The amount of water that people “need depends on the (opportunity) cost to them of consuming a little more water. People
“need” less water when water costs more.
We normal do not have a choice but to consume water. But we normally have a choice to consume a little less water.
Choices in water consumption like choices in electric power consumption, choices in housing consumption, and so on are
made at margin.

Who Gets What of Available Resources

Opportunity costs arise because resources are scacre. Because resources are scarce, taking one in action usually means
giving up something else, and societies will always have altarnative uses for its resources. As log as societies have
alternative uses for their resurces, there will have to be some means of allocating these resources among their alternative
uses. Thus, all societies have to confront the folloeing questions.
1. What should be produced with society’s resources? Land is used to produce both rice and con. Should we produce more
rice and pull some land out of corn production?
2. How should they produced? Rice can be produced using various combinations of resources. Should we use no
mechanical power at all and great deal of labor? Or should we use some mechanical power and thereby use less labor?
Should we employ a few skilled woekers to do the task and le a lot of unskilled workers remain unemployed.
3. Who should get what is produced? When one person or group gets a good or services, someone else will have to live
without it. How should goods and services produce with the society’s resources be distributed among the different groups
and among members of each group?

Market Allocation of Resources

Economics has a great deal to say about how markets allocate scarce resources. This section focuses on this topic.

Circular Flows in the Market Economy

Economics use economic models to explain facts and observation about how the world is put together. Figure 2.1 on the
next page presents a simplified circular-flow model a visual model of a “free” market in which allocation of resouces occurs
without government intervention. In this model, the economy simplified to include only two types of decision makers
households and business firms. ( A real -world economy concist of households, business firms, government, and the rest of
the world.)
A typhical household consists several individuals, but we will view each household as acting like a single decision
maker. As consumers, households choose what goods and of labor, land , capital, and entrepreneurial service to sell or rent
out to business firms. (Generally speaking, households sell resources to business firms, the government, and the rest of the
world.)
Business firms are economic units fromed by profit-seeking entrepreneurs who organize land, labor, and capital to
produce goods and services. A business firm may be a sole proprietorship (owned by who one individual makes all the
business decisions), a proprietorship ( owned by two or more individuals), or a corporation ( owned by shareholders who
own stock in the firm).
Business firms buy the resources that households sell and then use these resources to produce the goods and services
that they sell to households. ( In the real world, business
firms also sell goods and services to the government and to other business firms, but this simple version leaves out these
details.)

How Markets Coordinate Household and Firm Decisions

An important point to remember is that, in a market economy, goods and services as well as resources sell at prices that
are free to respond to market forces. (In a command economy, prices are administered by a planning bureaucracy). In a
market economy, household and business firms make choices and markets coordinate these choices through price
adjustments.
To see how markets coordinate decision through price adjustment, think about your local market for hamburger and
hot dogs. Price changes will signal to the producers that consumers taste has changed. As consumers buy less hamburgers
fall and buy more hot dogs, the price of hamburgers fall and the price of hot dogs rises. A lower price will signal that it is
less profitable for business firms to produce hamburgers. A higher price will signal that it is more profitable for business firms
to produce more hot dogs. ( Thus the expression “price are signal.”) Producers are motivated by profit in the market
economy and the business firms realllocate their scarce resources from the production of hamburgers to the production of
hot dogs.
One can see in this process why a market economy is said to use the price system
To determine who gets what of available resources. Prices change in response to changes in consumer taste and
production technology resulting in a recollection of resources. In short, the market acts to bring about that level of price that
 4

allows the independent decisions of households and business firms to be coordinated.

Market Price and Opportunity Cost

Information about the oportunity cost of producing a good gets reflected in prices are free to respond to market forces and
the price system functions well. Suppose input A is used to Produce both hamburger and hot dogs. If consumers value hot
dog highly, then the opportunity cost of using input A to produce hamburger is high. But strong demand input A by hot dog
producers will bid up the price of input A, which will make the cost of hamburger producion rise. The higher cost of
production will cause the market price of hamburger to rise.
In summary: In a well-functioning market, goods and services whose production have high opportunity cost will also have
high prices.In turn, goods and services whose production have low opportunity costs will also have low prices.
In Chapter 7, we will consider situation in which the market fails and hence market-determined price do not accuarately
reflect opportunty costs.

The role of the Entrepreneur

What is the role of entrepreneur in a market economy? An economy that relies heavily on markets will have much need for
entrepreneurs. In a market economy, it is change in consumer taste that ultimetly leads to a change in what isproduced and,
in turn, a reallocation of resources. Entrepreneurs have the ability to discover more effective ways of organizing resources to
produce the goods and services that consumer desire. They also have the incentive to gather and apply the best possible
information and to think about new products and new technology.

Resource Allocation in the Philippines

The marketbis the dominant method of resource allocation in the Philippines.
The items stocked in our grocery store and the services provided in the malls are those that the consumes want to buy.
Owner of sari-sari stores and barber shops usually responds to changes in the preferences of costumers. The decision of
private producers determine how must of the goods and services are produced. Most of the goods and services are
produced for those who are willing and able to pay for them. And in most cases, the jobs ath which we work and the homes
in which we ive result from market choices.
Most markets where Filipinos do most of their trading are unorganized collections of buyers and sellers. An example is
the market for rice. The buyers are millions of Filipinos and the seller are tens of thousand retail stores. The sellers know
that the buyers have a choice stores.
But in the Philippines economy, there are many examples of resources allocation by command. Many economic
decisions made with in families and budiness firms are base on command. In the broader economy, the government plays a
major role in allocating resources especially in determining what should be produce with society resources and who should
get what is produced. Various levels of government collect a part of our incomes as taxes and then spend he tax revenue to
provide services educational, health, and police that would have been underprovided if left to the market.

Conclusion
This chapter builds on the basic idea discuss in the previous chapter scarcity forces us to something else. In fact, what we
choose not to buy or do leads to the economic way of thinkingabout cost. When economists use the term cost, they mean
opportunity cost, th value we place on the best alternative that we forgo, or give up, when we make a choice. Opportunity
costs arise because resources are scarce.
Because resources are scarce, production of any good uses up some of the society’s resources, rendering such no longer
available to produce other goods we want. As long as societies have altenative uses for its resources, there would be need
for some way of determining who gets what of the available resources, goods, and services. The price system serves this
purpose in a market economy an economy in which resources are allocated by markets.
Much of economics and much of the succeeding chapters is about how to notion of opportunity cost could be used to guide
our own decisions or to understand and analyze the decisions of others, how markets allocate resources, and how
governments modify the outcomes of market allocation.