Economics and Opportunity Cost
Opportunity cost is the value of the next best alternative in a decision. Imagine that you have $150 to see a concert. You can either see “Hot Stuff” or you can see “Good Times Band. ” Assume that you value Hot Stuff’s concert at $225 and Good Times’ concert at $150. Both concerts cost $150 per ticket, but it would take you a couple of hours to drive to Hot Stuff’s concert and you have to be in school (the next) morning for an exam. Good Times’ concert is right here in town.
Explain how you would assess the opportunity cost of seeing Good Times in concert. What is the opportunity cost of going to Good Times’ concert? Develop a response that includes examples and evidence to support your ideas, and which clearly communicates the required message to your audience. Organize your response in a clear and logical manner as appropriate for the genre of writing. Use well-structured sentences, audience-appropriate language, and correct conventions of standard American English.
_____________________________________________________________________________________ People face trade-offs daily. As humans, we make decisions that require trading off one action against another [Principle of Microeconomics. 2012. 4]. The process of giving up something we enjoy in order to gain another good has been part of our human characteristics from day one. As a society, we should make good decisions only if we understand that there are other available options that will benefit us [Principle of Microeconomics.
2012. 5]. By definition, opportunity cost is the cost of an alternative action that must be forgone in order to pursue a certain action. Opportunity cost is present anytime we must make choices. As rational thinkers, we prefer to choose actions that will not only maximize our time, but also benefits our future. Let us imagine this particular scenario… My scheduled GRE date is tomorrow morning at 7:30 AM, yet I have the sudden itch to go to a concert tonight!
I can either see the Hot Stuff at the MGM Hotel in Las Vegas or the Good Times Band at the House of Blues in Anaheim. Both tickets for both the bands are $150 per ticket – but one is in the state of Nevada, which is about 4 hours away (not including traffic), while one is less than 10 minutes away from my home. Though both bands cost the same, I value Hot Stuff’s concert at $225. I am debating on which two bands to invest my time in seeing, or even second thinking whether or not I should stay home and rest in preparation for my GRE exam in the morning.
Marginal utility is a vital economic concept used to determine how much an item a consumer will buy. By definition, marginal utility is the additional satisfaction a consumer gains from consuming one more unit of a good or service. In my particular case, I am willing to pay a marginal utility of $225 per ticket, drive 4 hours to Las Vegas, and return to Anaheim once the concert is over around 1 AM. But does that make any sense for me to spend almost 12 hours, the night before my exam, attending a concert in another state? Absolutely not!
Although the satisfaction of attending a concert I’ve been waiting several years to see will be spectacular, the amount of satisfaction that comes with resting well and earning a high GRE score will be much greater. Giving up my favorite band, Hot Stuff, would be the first off the list. A good nights’ rest is simply the next best alternative to dismiss the concert. The Good Times concert at the Anaheim House of Blues sounds very tempting because the venue is extremely close to my home. Similar to the next best alternative in the aforementioned, utilizing the night before my test to rest and study is the opportunity cost.
Because I consider myself quite a rational person, I [must] systemically and purposely [do] the best [I can do] to achieve [my] objective, given the available opportunities [I am] faced with [Principle 3. 6]. By comparing the benefits and marginal costs of staying home, I am faced with a much larger economic benefit in my future due to my high score and acceptance to the school of my choice. I am reflecting a positive marginal change with my decision in selecting to choose to rest at home; a marginal change is a small incremental adjustment to an existing plan of action [Principle of Microeconomics.
2012. 6]. By spending my night at home reviewing my flashcards, I am demonstrating how well I am planning for my future. By comparing costs and benefits, I will be able to make a rational decision. My behavior changed when I realized my actions could possibly affect my GRE score and admissions into a prestigious program. In all, my decision to choose the next best alternative to stay home to rest and study will be driven by the marginal benefit exceeding the marginal cost [Principle of Microeconomics. 2012. 7].
The benefit of staying home to better prepare myself for my exam was much higher than spending a few hours at a concert and spending money – as I should be saving for graduate school. The next best alternative to both those possible actions will be to stay home. The intangible measure of my choice reflects implicit opportunity costs. Resting at home rather than expending my energy at the concerts has no currency value, therefore the implicit costs related to the forgone benefits are not easily accounted for.
The cost of not being rested before my exam is enormous. I will be sacrificing my future education and career goal. While my decision reflects implicit opportunity cost, explicit costs are the cash or equivalent expenses for which I would pay to attend either concert. In conclusion, the opportunity cost for staying home is much higher than if I were to attend the concerts. The value for my bright future by earning more during my career and gratefulness to be educational activity counterbalances the lost concerts and enjoyment.