Opportunity Cost

In making the choice which has been forced upon us we have to make some sacrifice. As children when we had finally made up our minds to spend our pocket money on chocolate we knew that we had just sacrificed the delights of ice-cream - if we did not know then it did not take us long to learn the bitter lesson. The farmer who plants a field with sugar beet has sacrificed x tons of wheat and the man who spends Saturday afternoon cheering (or cursing) his local team has just sacrificed the time in which he could have wall-papered the dining room (and so saved the expense of a decorator) or have worked overtime and so earned the extra money with which to pay the professional decorator. We speak therefore of the opportunity cost - the true cost of our ultimate choice is not the money paid the alternative foregone. The intriguing thing about this is that invariably we do not know what the outcome would have been if we had taken the alternative e.g., when a government, central or local, chooses to devote certain resources to a particular policy or project we may never know if those resources would have given greater satisfaction if they had been used in an alternative manner.

In practice when we choose we do not do so by means of random selection because all "ends" do not have the same attraction for us, in fact we decide on some order of priorities, we may reject completely one commodity or service in favour of another, but usually we decide to have a little more of one at the expense of a little less of the other. This is the significance of the margin which we shall study later.

Goods and services are rarely "free goods" i.e. so abundant that no-one will give anything for them; usually they are scarce and are obtained only by sacrificing something else, we call these "Economic Goods". It is ironical that supermarkets use the psychological approach of giving the impression of abundance with packed shelves and goods spilling out of their tumble-bins and yet prices reflect something very different. Mention must also be made at this point that scarcity is often deliberately contrived by stock-piling or by the deliberate destruction of goods in order to hold up world prices. Scarcity is therefore relative to the supply of and the demand for economic goods.

The scope of economics and the role of the economist

We began by outlining the difficulty of defining in a concise manner what the word economics implies: similarly there is difficulty in deciding how wide the economist's interests should range. Some economists favour a very narrow and analytical approach - to study the problem logically and give a recommendation based on sound economic principles. Such an approach is not really much use, e.g. if a government wished to raise more revenue front indirect taxation the best type of commodity to choose would be a necessary good with little possibility of substitution. In other words how could people avoid buying such goods and therefore paying the tax? What sort of goods are these and who buys most of them? Chiefly they would be basic foodstuffs and similar goods forming a large percentage of the expenditure of people with low incomes or large families. We would say that such a tax was regressive and could not be defended sociologically. Similarly if a Government wished to curtail public expenditure as a counterinflationary measure it would be easy to do so from a purely economic viewpoint, simply attack the social and educational services by reducing pensions, grants and allowances. The social implications of such measures are obvious - but what of the political? In some countries they would cause an immediate explosion; in a stable parliamentary democracy they would certainly have a bearing on the outcome of the next general election.

The economist therefore cannot work in isolation when he studies how men allocate their limited resources to satisfy their wants. The type of problem he studies and recommendation he may make have social, political, ethical and psychological implications. Economics today is one of the inter-disciplinary social sciences.

At the other end of the scale there is Prof. Alfred Marshall's definition of economics that it is "a study of mankind in the ordinary business of life" which could mean that all human activity is the concern of the economists. That definition is now generally regarded as being too wide.

Most economists today would limit their investigations to situations where Man has unlimited ends (but with different priorities for different groups) and where his resources, physical and material, are limited but can be used in a variety of ways to produce a range of different satisfactions. The pure economist does not question these ends, he accepts them as given, he does not moralise on the rights and wrongs, that is the concern of a different discipline. For example, some social scientists say that because more and more people wish to take drugs, the Law should be relaxed in the interests of greater personal freedom etc. These arguments are no concern of the economist, but he must point out that the true cost of these decisions is the ultimate medical care and the loss of the work contribution of such people and this is a cost to the State.

The economist therefore concentrates on how Man provides for this wants, and in this he examines not only how the goods are produced and how efficient are the methods by which they are produced, but also how they are distributed. He examines not only the transport and marketing systems but also the effects that political policies designed to re-distribute goods may have.

In some of his work the economist makes generalisations and explains the fundamental principles of his subject, but then he progresses to the "analytical" where he tries to show how the economic system operates. It is this latter part which justifies the subject being described as a science. In this work the economist can use either:

1. The Inductive Method i.e. collect all the facts concerned with the problem and see what the relationship is between them.

2. The Deductive Method - where he first constructs a hypothetical model i.e. makes certain assumptions from which he argues logically to his conclusions e.g. the concept of Perfect Competition.

Unfortunately the economist works under a handicap compared with other scientists. The physicist or chemist can work in controlled conditions: X + Y = Z in every experiment. If the result differs he can backtrack to find the unstable element, the variable. The economist has no such laboratory, his workshop is the world and his raw material is the most unstable, the most unpredictable element of all - Man. It is not surprising therefore that he makes liberal use of the phrase "all things being equal" when formulating his laws or making his forecasts. Similarly he should not be criticised unduly for "on the one hand ... however on the other..." because often there is no clear-cut black or white answer but an awful lot of murky grey. Economics does not claim to be an exact science, but then can a surgeon guarantee the success of every operation he performs or would a meteorologist back every forecast he made? What economics tries to do by observation and model-building is to understand the mechanism of the various economic systems and the more the student reads the more he will appreciate the progress made in the subject since the work of the great pioneers Adam Smith and David Ricardo nearly two centuries ago.

The economist who is concerned with human welfare must recognise that in the last resort people do not want goods as such, but simply the satisfaction they obtain when consuming those goods. Yet it is quite impossible to measure satisfaction. It is probable, for instance, that a schoolgirl derives more enjoyment from £55 spent on a new tennis racket than a millionaire does from £55 spent on a dinner. Yet we can never be sure - satisfaction, like love or pain, is a personal feeling which cannot be measured objectively. This means that government policy on redistribution of income rests on subjective judgements.

So the economist, working on the principle that two loaves are better than one, measures the output of goods and services and declares that any increase over a given period of time indicates an increase in welfare. Nevertheless, this approach is only an approximation, and its limitations have to be constantly borne in mind.

In practice many economic decisions involve subjective judgements; that is, they cannot be made solely by an objective appraisal of the facts but depend to some extent on personal views in interpreting facts. Indeed the relative size of the public sector and the extent to which the government interferes with the operations of firms in the private sector are determined largely by the political philosophy of the elected government.

The economist tries to be as objective as possible, establishing principles which, given certain conditions, show how the economy works and can be used to predict the likely results of policies.

Decision-makers may brush these principles to one side, either because facts necessary for a complete answer are not available or because different weight is given to assumptions. But at least economics provides a reminder of where objectivity ends and subjectivity begins.

Key words and word combinations of the text.

concise	balance of payment
comprehensive	inflation
employment	devaluation
necessities	chairman
Finance Committee	scale of operations
limits of income	insufficient
scarce resources	digression
credit card schemes	dissention
scale and context	ultimate choice
alternative foregone	outcome
alternative manner	random selection
priorities	margin
range	economic principles
revenue	expenditure
implications	general elections
interdisciplinary	relax
true cost	medical care
economic system	hypothetical model
assumptions	raw material
clear-cut	claim
human welfare	output
indicate	approach
appraisal	approximation