Chapter 1 What Is Economics? 27
taxes and cutting services. The federal govern-
ment makes the same types of choices.
Trade-Offs and
Opportunity Cost
Making choices involves evaluating two or
more options and selecting just one. Making
choices entails trade-offs. A trade-off is the item
given up in order to gain something else. For
example, there is a trade-off when you spend
$50 to buy a jacket. The trade-off is the other
ways you could have spent the $50, including
saving it for a future purchase.
Making a choice results in a trade-off,
and a trade-off results in an opportunity cost.
Opportunity cost is the value of the best option
or alternative given up. If you turn down an
after-school job because you have to be at soc-
cer practice, there is an opportunity cost. The
opportunity cost of playing soccer may be the amount you could have
earned working. On the other hand, the opportunity cost of working
instead of playing soccer could be the pleasure and enjoyment of playing
a sport you love.
Opportunity cost can be measured in terms of dollars, time, enjoy-
ment, or something else of value. The opportunity cost of a decision often
varies from one person to the next. It depends on what the person who
made the decision values.
For example, if spending time with your family is most important to
you, missing family meals may be the opportunity cost of going to soccer
practice. If getting good grades is most important to you, losing time to
study may be the opportunity cost.
Opportunity cost applies to economic choices of families, businesses,
and governments as well as individuals. Weighing opportunity cost is a
valuable decision-making tool. You will read more about decision-making
tools in Chapter 5.
Scarcity and Economic Systems
All societies are faced with scarcity and must make choices. The prob-
lem of scarcity applies to individuals, families, businesses, and organiza-
tions. Governments also make economic choices that affect everyone.
At the local level, governments make many choices in allocating limited
resources. For example, a local government may need to choose between
using funds to build a public swimming pool or to repave the streets.
The federal government makes the same types of choices. For example,
the government may have to decide between investing in oil drilling and
investing in new energy sources. Major political and economic decisions
center on how to divide limited national resources given unlimited national
1-2
Clothes can be both a need
and a want.