Understanding the difference between financial and opportunity costs Like most people, the Foleys do not have enough money to buy everything they would like. They have to make choices. When we make a purchase there is usually a consequence, or an opportunity cost, to our decision. The opportunity cost refers to the item you must do without in order to buy another item. Example: Jason Foley has e10, enough money to go to the cinema or to buy phone credit, but not both. If he decides to go to the cinema then he must do without phone credit.
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The financial cost of going to the cinema is e10. The opportunity cost of going to the cinema is not having e10 phone credit.
Numeracy
Answer questions 1 and 2 on your own. Then compare your answers with another student’s answers.
1. Marie had e10 pocket money and was undecided whether to spend it on a magazine or a trip to the cinema. She decided to buy the magazine.
(a) What was the financial cost involved? (b) What was the opportunity cost involved?
2. Imagine that you have just purchased the following items. Identify what you could have bought instead with the money.
What I bought Video game (e10) Large television (e1,500)
What I could have bought instead ________________________ ________________________
Three bedroom house (e300,000) ________________________
Basic Rules for Managing Personal Income and Expenditure Keep a written record of all your income and expenditure so that you know how much is coming in and going out. Always spend less than your income. This way you can save money to have in the event of a financial emergency (e.g. medical expenses). Pay the most important and essential bills first. Essentials such as food, electricity and mortgage payments should take priority over non-essential but ‘nice-to-have’ expenditure, such as magazines or concert tickets.
