In many aspects of life, there are ways to save money by becoming more informed about what we’re buying or by learning how to do something ourselves rather than paying for the good or service. For example, a friend of mine learned how to fix guitars because, as a musician, this will save him from having to pay for a lifetime of professional repairs. Personally, I like to cook, and thus I save money by preparing my lunch at home rather than buying it at work. However, my musician friend doesn’t like to cook and therefore spends more money on pre-made lunches than I do, and uses the time he saves by not cooking to engage in activities more valuable to him.
This illustrates one of the fundamental principles of economics: we gain from specialization in the face of scarcity because everything has an opportunity cost. In this case, the opportunity cost of becoming more informed about cars is the time I spend learning about cars rather than doing other activities I enjoy. Given the limitations of time and money, no one can become an expert in everything. To be truly self-sufficient would require a return to our hunter-gather roots when we spent the majority of the day finding food, and even then you might want to assign someone to gather the berries, someone else to prepare the meal, another to build shelter, etc.
A common misperception is that economics is aimed solely at maximizing profit. However, a classic application of economics is the study of how people choose to spend their money and time given the limitations they face in order to maximize utility, or a person’s level of happiness. Because there are not enough hours in the day to find the cheapest way to do everything ourselves, we decide to spend our time either doing things we enjoy (that is, that directly give us higher “utility”) or getting paid to do things we are particularly good at (that is, tasks in which we have a comparative advantage). With the money we earn from working, we can then pay others to get the rest of what we want or need.
2. The exact opportunity cost of an activity can be hard to determine, since it is not easy to put a “value” on your time. How is the opportunity cost of time different for someone who earns a fixed salary versus someone who can always choose the number of hours he or she works?