Almost every undergraduate introductory economics course begins the same way: with the definition of economics. Economics is the study of how people use scarce resources to satisfy unlimited wants. At the core of economics is the idea that our world is a place plagued with scarcity that is, we do not have all the resources we want. As a result, we must make choices. When we make a choice, that choice necessarily means that we have to give up something. The something we give up is called opportunity cost. Economists define opportunity cost as the next best alternative or the highest valued alternative to the choice that was made. If we choose to produce a good using a resource, the opportunity cost of producing that good is the highest valued alternative use of that resource.
Economics The study of how individuals and society make decisions about how to use scarce resources to satisfy unlimited material wants.
Scarcity The condition that exists when there are not enough resources to satisfy all the wants of individuals or society.
Choices The decisions individuals and society make about the use of scarce resources.
Opportunity Costs The next highest valued alternative that is given up when a choice is made.
Why is it important to teach students about opportunity cost, scarcity, and choice in the K-12 classroom? These concepts can be thought of as the core of capable decision-making. If we teach our students, beginning at an early age, the critical thinking skills to analyze problems and make informed decisions about their use of time and money, they are likely to be better students, save more over their lifetimes, and choose life paths that result in higher standards of living. As schools look to teach their students more about personal finance topics such as budgeting and saving, equipping students with a strong understanding of opportunity cost, scarcity, and choice is essential.
Teaching these concepts from an early age as a progression from kindergarten through senior year in high school is important. In the lowest grades, students can identify two alternatives, the choice they would make between them, and the opportunity cost of their decision. In upper elementary school, students can use the PACED decision-making model to decide between more than two alternatives. In the PACED model, students learn to identify the problem (P) or decision they have to make, list the alternatives (A) available to them, identify a set of criteria (C) they can use to evaluate the different alternatives, evaluate (E) the alternatives based on the criteria, and make a decision (D) between the alternatives. The students are then asked to identify the opportunity cost the next best alternative of the choice they made.
By middle and high school, students should be able to identify more complex opportunity cost problems and make use of a production possibilities curve to show how production in a two-good economy is allocated. Discussions of opportunity cost in the high school classroom can be used to address pressing current events. For example, you might ask your students to assess this situation: driving five miles to a gas station that sells gasoline for 5 cents cheaper or going to the gas station around the corner. They can discuss how to identify the opportunity cost associated with buying the cheaper gas. When looking at environmental issues, you can ask your students to research municipal recycling programs and identify the opportunity cost associated with a town’s adopting a mandatory recycling program.
The connections with personal finance issues are some of the most important contexts in which students can use opportunity cost. Teaching middle and high school students to budget and make realistic spending decisions are important. Doing so also lends itself well to discussions of opportunity cost and choice. Most household budgets require individuals and the household to make tradeoffs between different things on which to spend household income. With sound decision-making skills that are well grounded in the concept of opportunity cost, our young people can be expected to make more thoughtful budget decisions as they go off to college and the world of work.
Andrew T. Hill, Ph.D.
Michael Munger, chair of political science at Duke University, in his online article “A Fable of the OC,” published at the Library of Economics and Liberty, provides some fascinating insights into opportunity cost.
Munger, Michael. “The Fable of the OC,” Library of Economics and Liberty (2006). www.econlib.org/library/Columns/y2006/Mungeropportunitycost.html
Russian economic educator Liudmila Guinkel has written an innovative high school lesson entitled “Scarcity and Choice.” Written in English and developed as part of the National Council on Economic Education’s Training of Writers program, Guinkel’s lesson provides an active-learning format for teaching about scarcity, opportunity cost, choice, and the production possibilities frontier. The lesson can be downloaded at www.ncee.net/ei/lessons/OldMac/lesson5/ .
The National Council on Economic Education offers a free sample lesson from its publication Focus: EconomicsGrades 3-5. The “Back-to-School Scarcity” lesson for elementary school uses active-learning methodologies to engage students in using a decision-making grid to choose between alternatives. The lesson can be found online at www.ncee.net/resources/lessons/download.php?durl=focus35_lesson2.pdf .
The PACED decision-making model uses a five-step process and a goal to guide the decision-making process. In primary grades, students can use + and - or 0 and 1 in the grid to indicate whether or not an alternative does or does not meet each of the criteria. The answers are then summed for each alternative and a decision is made. In later grades, a numbered scale (e.g., 0 to 3) could be used to indicate how well each alternative meets the criteria. After summing the results, the students indicate the choice they would make and then identify the opportunity cost of their decision.
Steps in the PACED model:
Students will understand that productive resources are limited. Therefore, people cannot have all the goods and services they want. As a result, they must choose some things and give up others.