In Part 1 of Fundamental Economic Concepts, we discussed Scarcity and Individual Subjective Value.

Today we are going introduce the concepts of production, time preference, and opportunity cost.
possessing value to the individual do not occur abundantly in nature and cannot be consumed without first being produced, created, harvested, etc. through a very specific process. Goods of value must first be produced through individual thought and individual action before they can be made available for consumption. In short, life is the process of purposeful, self-sustaining action to produce things of value for consumption.

Because individuals must act in order to obtain goods of value, it logically follows that present goods, as a rule, are always preferable to otherwise identical goods in the future. This is the law of time preference. The law of time preference is an essential fact of the human condition that is necessary in the explanations of many economic concepts. Time preference, however, is often forgotten or ignored by mainstream economists leading to necessarily false conclusions.

Human desires are virtually limitless, but resources, including our time, are limited to finite quantities. For this reason, individual humans must each decide how to best allocate their time and available resources to obtain the goods they subjectively value. Since it is impossible to satisfy all of our desires instantaneously, every action we pursue in order to obtain something of value has a cost associated with it; the cost of the foregone alternatives.

The popular economic expression used to explain the cost of foregone alternatives (or opportunity costs) is, “there is no such thing as a free lunch.” Even if someone else pays for your meal, the cost associated with the lunch is actually the value of the next best alternative you could have been enjoying instead. One individual cannot build a house, go to the mall, eat dinner, harvest crops, and watch a movie all at the same time. We have to choose what we value most based on individual preference and available resources.

The fundamental question, surrounding production of goods is not whether or not to produce, but rather how efforts are best directed to achieve the most desired values for consumption.

Check out this article by Dwight Lee - Creating Jobs vs. Creating Wealth: The Jobs Created by a Government Project Represent the Opportunity Cost of the Project.

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