Economic Concepts

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Concept Application of Concept from Personal Experience Reference to Concept in Reading

Opportunity Cost

Opportunity cost is the cost of passing up the next best choice when making a decision. For example, if an asset such as capital is used for one purpose, the opportunity cost is the value of the next best purpose the asset could have been used for. Opportunity cost analysis is an important part of a company's decision-making processes.

I was recently part of a team making a decision to purchase some automation equipment for use in the plant. We were faced with the decision to upgrade an existing machine to improve quality and production rate, or to purchase an entirely new machine that would achieve both and also eliminate one person from the job classification. Our decision was to upgrade the existing equipment and forego the purchase of the new. The capital outlay for the new equipment was too great even with the loss of the person from the job classification and the same benefits could be realized by the simple upgrade to the existing equipment. McConnell & Brue (2004) define opportunity cost as “the amount of other products that must be forgone or sacrificed to obtain 1 unit of a specific good.”

Circular Flow Model

The Circular Flow Model is a "picture" of a market economy in action. The Factors of Production (land, labor, capital and entrepreneurship) flow from households (consumers like you and me) to producers (businesses). Goods and services flow from producers to consumers and, in exchange, money flows in the opposite direction.

As an employee I am a component of the circular flow model. I am a part of the resource market and sell my ability as a worker to a business that pays me a wage for my services. My wages are a cost to my employer and in this case resources flow from my household to my company, and money flows from my employer to my household. I use the income from my wages to purchase goods and...