Activity 1(g)

Activity 1g: Shopaholics – opportunity cost and the link to efficiency


1. As defined earlier, opportunity cost is the value of the next best alternative foregone. The opportunity cost of excessive spending could therefore be the interest that is foregone from the amount that could be saved. You might also give up the opportunity to engage in alternative leisure activities such as reading or eating with friends because you are always engaged in shopping-based activities.

2. Inter-temporal efficiency refers to ability to maximise society’s wellbeing across different time periods.This would mean (in terms of consumption) that a goad balance is achieved between consumption of goods and services in the current period (and balanced with sufficient savings and investment) and consumption in the future. It might also relate to other quality of life factors such as the environment (are resources being depleted excessively such that future generations will suffer from reduced access to key environmental resources) and health outcomes( are food and substance decisions being made today which might reduce quality of life for the individual and society in the future)

3. Excessive consumerism might be intertemporally inefficient because it is often associated with an increase in negative externalities and resource depletion. Many consumer goods are used for short periods of time and then discarded as waste (such as fast fashion). This imposes a cost on future generations and leads to a decline in the ability of the economy to maximise society’s wellbeing. Resource depletion will also mesn that future generations may not be able to meet their needs and wants as effectively.

It might also be considered intertemporally inefficient because those who consume excessively may not have any savings available for investment and/or are highly indebted. This will mean that they have to sacrifice future income towards the servicing of debt. This might mean that they can’t afford to purchase as many goods and services in the future. It therefore indicates an imbalance (or bias) towards current consumption (and satisfaction) which comes at the cost of future satisfaction.

4. The average consumer might not consider all of the implications associated with his or her spending decisions. As you may have learned in Unit 1, consumers often have a “present bias” suggesting that they would accept a smaller payoff in the current period than wait for the benefits associated with delayed gratification. People may also be unwilling to do the necessary thinking to determine what the next best option is when they are making a purchasing decision. For example, if faced with a pushy salesperson or when there is a limited time offer, people might suffer from bounded rationality or bounded willpower. In some cases, people make impulse purchasing decisions and may not consider the opportunity cost until after the transaction has been completed.

5. Fast fashion is often associated with a quick turnaround in the fashion cycle and an increase in the number of clothing items that end up in land fill. Fast fashion also means that more resources are used to produce the clothes and there is more pollution created. All of this ultimately means that satisfaction is being maximised in the current period (although this is open to debate) and comes at the expense of future living standards. Future generations may face a lack of productive resources, live in a more polluted environment and be subject to the erratic weather patterns that are linked to climate change.As a result, there is likely to be an imbalance between current consumption patterns and future utility maximization.