Opportunity Costs

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• http://www.investopedia.com/terms/o/opportunitycost.asp

• Should I go to work today? Should I go to college after high school?

• Should the government spend money on a new weapon system? These are decisions that are made everyday; however, what is the cost of our decisions?

• What is the cost of going to work, or the decision not to go to work?

• What is the cost of college, or not to go to college? • Finally what is the cost of buying that weapon

system, or the cost of not buying that weapon? • In economics it is called opportunity cost.

• Opportunity cost is the cost we pay when we give up something to get something else. There can be many alternatives that we give up to get something else, but the opportunity cost of a decision is the most desirable alternative we give up to get what we want.

• Let’s look at our examples from above. If you have a job, what do you give up to go to work? There are many possibilities. I could sleep in. If it is a nice day I could take my dog to the park and play all day. Or, I could even spend the day looking for a better job right? I give up all of these things if I choose to go to work. What I get from working is a greater benefit than the cost of giving up these things. But, opportunity cost is the most desirable thing given up not the aggregate of the things we gave up.

• Let’s look at the college example. We are all told to go to college so you can get a good education and that will translate into a good job. How do we know that college is such a good thing? How much college do we need? Let’s look at some numbers from a study on education from the Institute of Government and Public Affairs:

• There are distinct benefits of a college education. A study conducted by the Institute of Government and Public Affairs for the Illinois Board of Higher Education, showed the following benefits:

• Higher Earnings – Earning a bachelor’s degree provides the average student with over $590,000 in future earnings. Similarly a professional degree provides a present value to the student of almost $1.25 million in future earnings.

• Labor force participation rates and employment rates for people aged 25 and over increase with increased levels of education.

• People with college experience contribute time and money to charitable causes at a higher rate than those with less education.

• Increased levels of education are associated with the increased likelihood of voting or registering to vote.

• “In addition, college can provide many other benefits that are less tangible, and will help your child become a better-rounded individual. Benefits include increased self-awareness, the ability to think critically, and an opportunity to meet many different people. Overall, the entire college experience will provide your child with a lifetime of benefits”.

• As we can see there are many benefits to a college education. So what are the costs? There are monetary costs for sure. Also, we will spend four or more years going to classes. We could be working and earning money instead of going to college. Finally we will be giving up free time for study time that could be used to do other things.

• the opportunity cost of going to college is the money you would have earned if you worked instead. On the one hand, you lose four years of salary while getting your degree; on the other hand, you hope to earn more during your career, thanks to your education, to offset the lost wages.

• Here's another example: if a gardener decides to grow carrots, his or her opportunity cost is the alternative crop that might have been grown instead (potatoes, tomatoes, pumpkins, etc.).

• In both cases, a choice between two options must be made. It would be an easy decision if you knew the end outcome; however, the risk that you could achieve greater "benefits" (be they monetary or otherwise) with another option is the opportunity cost.