Last weekend rather than heading to the supermarket to do my weekly shop, I set off to explore Rocklea markets. As I was driving there, I was thinking how this was a little out of my way. The drive to the markets took me an extra 20 minutes more than it would take to get to my local supermarket. It got me mentally weighing up the value and benefits of getting up early to go to the markets over shopping at my local supermarket.
One way to help explain the pros and cons we think of when deciding what to do, is a microeconomic theory known as opportunity cost. Understanding this can help us, when rationalising the best economic decisions and working out what benefits we value most.
We all have the same number of hours in a day, but we all make different decisions. What affects our decisions are opportunity costs. There are certain values we place behind every decision we make, which could be deciding the everyday household items we use or that long awaiting trip we are planning. We just may not know it or think about it, but every decision we make has a value to us.
When we decide to purchase one item over another, we are saying to ourselves, I value this more than the alternative. The opportunity cost is what you gave up to receive the item you chose. To put this in a simple example, if you have two choices either an apple or an orange and you chose the apple, the opportunity cost is the orange. You gave up the opportunity to take the orange to choose the apple, in this case the opportunity cost is the value of the orange you did not want. Value has two parts, benefits and cost. The apple may have been $1.00 and the orange $2.00; the apple may have been cheaper, but you also would enjoy the apple more. So the opportunity cost is the orange for favour of the choosing the apple which gave you more enjoyment when eating.
To make good economic decisions, we want to choose the option with the greatest benefit and the lowest cost. We also can make the best choices, deciding if the value of the benefits of the higher price is of more valued to us, than the value of the benefits of the lower cost.
The value of choice to you may be the benefit of time or enjoyment. The benefit does not have to be measured in financial terms. Time is value, and what you do with you time is just as valuable as what you do with your money. If you only had two hours, and you could either choose to go to the beach or the shopping mall and you decided to go to the beach, your opportunity cost is the time you could have spent at the shopping mall. Benefits of better health could also be a value. The decision to buy a can of coke for $1.30, or a bottle of water for $2.00, and you chose the bottle of water, your opportunity cost was the 70 cents you could have saved buying the can of coke, instead of choosing the higher health benefit.
In summary, scarcity creates choice and every choice has a value to us. That value can be looked at in terms of benefits and cost. Value is not always of monetary value, but also measured in terms of enjoyment or personal benefits. The opportunity cost is not the value of what we chose, but the value of the next best alternative we did not choose.
My decision to go to the market or to go to the local supermarket, also had values in terms of costs and benefits. The supermarket is closer, with a conveniently designed layout, that would have made my shopping trip from home and back in under an hour, giving the benefit of more free time to enjoy, but I think the supermarket fruit and vegetable range are limited, with some items expensively priced. The market, took a further 40 minutes driving time and longer time to walk around the stalls, but they offered highly competitive prices for fresher products. Here my opportunity cost, was the time I could have saved going to the supermarket, which was closer to home when I chose instead to go to the market, which had the wider range of fresher produce.
For us to become more confident consumers, we need to understand the factors that contribute to our decision making processes. If we can learn about costs and benefits and recognise what we value, we can start making the best informed purchasing decisions. For myself, I value a healthier lifestyle and a more sustainable environment. So thinking about these values, when I compare the alternatives I have on offer, will help to make the best choices for me.
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