A Framework for Human Action
"All we have to decide is what to do with the time that is given to us." -J.R.R. Tolkien
Humans are purposeful. People have goals and act to accomplish those goals. The goals may be simple or complex, altruistic or selfish; it all depends on the individual. In order to complete their goals and satisfy their desires, people need to use scarce resources, such as time, natural resources and effort. There are only finite resources in the world and nearly infinite human desires and goals to satisfy, so people must choose which desires to satisfy and which to ignore.
Choosing one thing means not choosing something else. For example, a family might have to give up on buying a new car in order to go on vacation. Each choice people make uses up some of their scarce resources. The choice of going on vacation uses up time that could have been working or studying. Money is used up paying for the journey. Jet fuel is used by the airplane taking the family to their destination. All the goods and services that the family buys on vacation require natural resources, time to consume and work to produce. Resources used to satisfy one person's goal cannot be used by other people who may want to use them. Conflict often arises due to the scarcity of resources that everyone needs to achieve their goals, but the conflict does not need to be violent.
In order to decide which desires to satisfy, people weight the costs and benefits. Costs are aspects of the consequences of their action that they don't like, and benefits are consequences that they do like. The costs and benefits of each action are entirely subjective. Everyone has preferences that are a little different than everyone else. One person might like chocolate ice cream more than strawberry and vice versa. There is no objective way to compare value between people, since value only exists in the minds of individuals. Something that one person likes a lot might not be valued at all by someone else.
Opportunity cost is defined as the value of the best alternative you have to give up to get what you decide to do. Opportunity costs are a way of thinking about why people choose the things that they do. Someone will not choose something if they have a better alternative. Likewise, there are situations where someone must choose between two bad alternative, but they still must make a choice ("stuck between a rock and a hard place", etc). When people make choices that seem bad to an outsider, it is often the case that their other alternatives are even worse. For an alternative to be an opportunity cost, it must be known to the chooser. If a person is not aware of an alternative, they can not choose it. Opportunity cost is one of the most critical ideas when explaining human action. It combines the ideas of scarcity, choice and purpose. People want to achieve things, but they only have so many resources, so they must give something up to get something else. If you can figure out what alternatives people have and how they value each of those alternatives in relation to their goals, you can explain and predict how they will act.
The Parable of the Broken Window.
Let's take a look at a couple of examples.
A family is trying to decide whether to buy a new car or go on vacation. Both things cost the same in money terms.
New Car
Costs: Deal with car salespeople, get rid of old car, have to spend time picking the new one out, etc.
Benefits: Faster and/or safer car, more stylish, better gas mileage, status symbol.
Vacation
Cost: Time spent out
Benefits: More fun, get to see the world, stress relief.
The opportunity cost of buying a car is that the family can not go on vacation (they only have enough money for one.) They must decide which they would like to do, which depends on their subjective valuation of the alternatives.
Humans are purposeful. People have goals and act to accomplish those goals. The goals may be simple or complex, altruistic or selfish; it all depends on the individual. In order to complete their goals and satisfy their desires, people need to use scarce resources, such as time, natural resources and effort. There are only finite resources in the world and nearly infinite human desires and goals to satisfy, so people must choose which desires to satisfy and which to ignore.
Choosing one thing means not choosing something else. For example, a family might have to give up on buying a new car in order to go on vacation. Each choice people make uses up some of their scarce resources. The choice of going on vacation uses up time that could have been working or studying. Money is used up paying for the journey. Jet fuel is used by the airplane taking the family to their destination. All the goods and services that the family buys on vacation require natural resources, time to consume and work to produce. Resources used to satisfy one person's goal cannot be used by other people who may want to use them. Conflict often arises due to the scarcity of resources that everyone needs to achieve their goals, but the conflict does not need to be violent.
In order to decide which desires to satisfy, people weight the costs and benefits. Costs are aspects of the consequences of their action that they don't like, and benefits are consequences that they do like. The costs and benefits of each action are entirely subjective. Everyone has preferences that are a little different than everyone else. One person might like chocolate ice cream more than strawberry and vice versa. There is no objective way to compare value between people, since value only exists in the minds of individuals. Something that one person likes a lot might not be valued at all by someone else.
Opportunity cost is defined as the value of the best alternative you have to give up to get what you decide to do. Opportunity costs are a way of thinking about why people choose the things that they do. Someone will not choose something if they have a better alternative. Likewise, there are situations where someone must choose between two bad alternative, but they still must make a choice ("stuck between a rock and a hard place", etc). When people make choices that seem bad to an outsider, it is often the case that their other alternatives are even worse. For an alternative to be an opportunity cost, it must be known to the chooser. If a person is not aware of an alternative, they can not choose it. Opportunity cost is one of the most critical ideas when explaining human action. It combines the ideas of scarcity, choice and purpose. People want to achieve things, but they only have so many resources, so they must give something up to get something else. If you can figure out what alternatives people have and how they value each of those alternatives in relation to their goals, you can explain and predict how they will act.
The Parable of the Broken Window.
Let's take a look at a couple of examples.
A family is trying to decide whether to buy a new car or go on vacation. Both things cost the same in money terms.
New Car
Costs: Deal with car salespeople, get rid of old car, have to spend time picking the new one out, etc.
Benefits: Faster and/or safer car, more stylish, better gas mileage, status symbol.
Vacation
Cost: Time spent out
Benefits: More fun, get to see the world, stress relief.
The opportunity cost of buying a car is that the family can not go on vacation (they only have enough money for one.) They must decide which they would like to do, which depends on their subjective valuation of the alternatives.