10/13/2009

Opportunity Costs in the Simplest Form

As I read through chapter 7 I started thinking more and more about opportunity costs. I tried to come up with a real complex example of a real world experience that could apply to most people, well, besides the opportunity cost of going quitting a job and earning a degree which is in most textbooks. But I face an opportunity cost almost every 3-day weekend. I grew up in a small town in Northern Utah where it takes about 6 hours to drive home to see my family. From Cedar City, you can make it to the beach in 6 1/2 hours. I love seeing my family but I also love hanging out on the beach.

The book defines an opportunity cost as the net revenue from the best alternative course of action. In my situation of either going home or to the beach I replace the word revenue with benefit. So this is how I weigh my difficult decision: Gas to each place is about the same, the weather is almost always better in San Diego, and going to California seems like more of a road trip and different experience then going home. So on a 3-day weekend, I usually go to Huntington Beach or San Diego instead of home. It's not that I love the beach more than my family, it's just that the opportunity cost is better. What are some opportunity costs that others in the class face?

http://www.netmba.com/econ/micro/cost/opportunity/

5 comments:

Dr. Tufte said...

-1 on Jonathan for a grammatical error.

This is a great post. We start out in principles talking about opportunity costs in terms of money because that's what is easy to observe. But, in real life, opportunity costs include all of the non-monetary things associated with making our decisions. Opportunity costs can explain a host of decisions - from why we choose to go to convenience stores when we need few items, to why football teams usually choose to punt on 4th down, to why we slow down at intersections even when there isn't a stop sign.

Adam said...

our post is kind of funny. I had thought about this kind of situation before. It's interesting that we often value social situations at a much higher opportunity cost than we do other things. For example, many people (not excluding myself) act polite to others to their face, but do not really like them. We value our "good name" and reputation much higher than what we honestly think. Like Dr. Tufte said, opportunity costs surround us. Whatever we decide to do at any point in time, we are almost literally valuing it higher than anything else we would have done. This is because by playing video games, watching a movie, etc. we are saying that our time is better spent that way than in any other way.

Colin said...

In answer to your question, the opportunity cost that I often face deals with television. After a long day of work I like to relax. This comes at a high price as homework or time with friends would most likely be a better use of time.

Thomas said...

As Dr. Tufte and Jonathan pointed out, there are plenty of opportunity costs that are not monetary costs.

As an example that is related to school work, I am currently studying to retake the GMAT exam in a few weeks, in hopes of a higher score. Every night when I get home I am faced with several different opportunities, each of them with their own innate opportunity costs.

Should I spend two hours studying for the GMAT, should I spend two hours studying for MBA courses, or should I spend two hours with my wife and daughter? Right now my time is better spent studying for the GMAT since the test date is rapidly approaching, but it is sometimes hard to justify the opportunity cost of neglecting my other options.

Brendan said...

When dealing with opportunity costs, especially from a non-monetary standpoint, I cannot help but think about food. Do the benefits of not eating a BK double whopper or a bowling alley pastrami burger for health reasons really outweigh the happiness and satisfaction of a tasty meal while the wives are at work? So much can be said about healthy eating that wives force upon us grease-deprived carnivores. This is a struggle I constantly deal with; health and happy wife or grease and happy appetite. I have learned to indulge in the former.