Opportunity Cost

I received a letter from an old friend who asked:

I have a friend who is a writer and artist. One of his current projects is a novel. At one point he needs to explain opportunity cost. It recalled for me that you wrote a book for kids explaining the fundamental principles of economics.

Would be willing to share the text with us?

This was my reply.

I would of course be willing to share my text with you. The title is Economics for Infants. However, not sure you find opportunity cost discussed, at least not explicitly. However, there is always this you can look at (it can be ordered by the library and the paperback is pretty cheap):  

Free Market Economics, Third Edition. An Introduction for the General Reader The Elgar webpage is  here. And I do notice that Opportunity Cost is discussed on four separate occasions within the book, once even using a diagram. Highly recommended, if I do say so myself. In fact, I do say so myself. 

I just put up a blog post referring to the book, which I will copy below. Here is what I said: 

From The switch to green energy can be the biggest bonanza in history.

“Australia is the best placed nation on earth to be the global winner in the net-zero world, with 672,000 jobs created and $2.1 trillion in economic activity generated by 2050.

“Jobs can be created by getting rid of technology. Economic activity can be driven forward by useless and non-productive forms of “investment”.

“But living standards can only rise if the value of output is greater than the value of the inputs used up. If you think massively increasing the cost of inputs through alternative forms of energy will increase value added, and therefore living standards, you are an economic incompetent. Value added is the core concept surrounding opportunity cost, which also necessitates understanding the economic meaning of cost within economics.

“In my economics text, Free Market Economics, the single most important chapter is the third, on Value Added. No other modern textbook that I know of actually discusses value added beyond a para or two, but without value added at the core of one’s grasp of economics, you will never understand a thing that matters.”

Which reminds me of this, which I may or may not ever have sent to you before: I, Mechanical Pencil: Why a socialist economy can never work. There you find this, which is near enough the core concept of opportunity cost as it is practised in the market: 

What prices must do is reflect how much something costs. And what information about costs does is help entrepreneurs work out which is the least costly way to produce whatever it is they produce. It is important to find the least costly way to produce because the fewer resources used up in making each particular good or service, the more resources are left over to produce something else. Keeping production costs down is essential to maintaining and building our prosperity. This is why prices matter so much. If prices are properly set in the market, the revenue received by each entrepreneur will cover all the costs of production. If every producer sets their own prices, then the prices charged for every input will provide the essential guidance to entrepreneurs on how to keep production costs down.” 

Whether any of this ends up in the book I may never know.

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