Mankiw’s Ten Principles of Economics, Essay Example

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Essay

Introduction

Opportunity cost is an important concept in economics and personal finance. Opportunity cost refers to the cost of the alternatives that one foregoes when he/she makes a decision.  For example, if an individual chooses to attend college he/she may contemplate that, over the long-run, future earnings will be greater than if he/she did not attend.  There is copious evidence to back up this viewpoint; however, in order to analyze the true net cost benefits of such a decision, he/she must also calculate what is foregone during the college time period: the total (monetary) investment of $100,000 and total lost earnings over the (hopefully) four-year attendance period (example: the individual is foregoing $120,000 if he/she would make $30,000 over the four-year time period.).  For this exercise, the opportunity cost will be explored in a different scenario: one has $150 to see a concert of either “Hot Stuff” or the “Good Times Band.” What is the opportunity cost of going to the respective concert venues?

Analysis

In order to properly assess opportunity cost in this scenario, one’s preferences must be taken into consideration.  The information provided states that I value Hot Stuff’s concert at $225, while I value Good Times’ concert at $150. Thus, from the vantage point of individual preference, the decision to attend Hot Stuff’s concert would result in an increase of personal utility of roughly $75.  The decision to attend Hot Stuff’s Concert would result in a net positive benefit of $0 (price of the concert ticket $150; personal utility received from attending the concert $150.)

Other factors, however, also play a critical role in calculating opportunity cost: I must travel several hours to attend Hot Stuff’s concert. I also need to be in school early the next morning to participate in a school exam.  These factors must be carefully considered before a final decision can be rendered.

First, the calculation of opportunity cost for attending Hot Stuff’s concert. From a monetary perspective, attending Hot Stuff’s concert will actually result in a positive fiscal outcome: Although the concert ticket costs $150, the utility derived from the concert is $225.  Thus, attendance results in a net opportunity cost benefit of $75. The calculation of opportunity cost for attending Good Times’ concert would result in a net opportunity cost of $0: This is because the price of the ticket is $150; the personal utility derived from attending the concert is also equal to $150.

Attending the concert also leads to a number of different intangible costs or benefits depending on how one views them. The first intangible cost is spending several hours driving to the Hot Stuff concert. The drive to the concert will result in expenditures on gasoline; however, there is no further information regarding how much the cost is.  The main cost incurred, therefore, will be the loss of time on the way to and from the concert venue. There is an additional intangible cost added to the Hot Stuff concert trip: The morning after the concert an exam will be issued.  Thus, if I decide to attend the concert the night before, that might exert a negative impact on test performance. There are no intrinsic costs mentioned for attendance at the Good Times’ concert.  That is, Good Times’ concert will be held locally allowing for quicker transportation and the ability to return home at a decent hour without incurring adverse impact for the next morning’s exam.

Decision

Overall, I would chose to attend Hot Stuff’s concert.  This decision was based on considerations of personal utility and intangible costs related to attending the concert.  I clearly value attending the Hot Stuff concert more so than Good Times’ concert: This is evident in the $75 net benefit assigned to attending the concert.   My personal utility would be greatly enhanced by attending the concert, particularly compared to the other option of attending Hot Times’ concert.

The main opportunity cost incurred in this decision is the loss of time to commute to the concert venue and the potential poor grade that I receive on the test the day after the concert.  These issues must be carefully considered; time is also worth money and one may argue that education and knowledge is fundamental to future earnings and wellbeing.  However, I have decided to attend the Good Times concert in spite of these costs and the ability to return home quickly after the concert and potentially perform better on the test.  This is simply a personal decision based on the amount of utility received- nothing more, nothing less. It is an extremely important exercise, however, to recognize the explicit and implicit costs associated with this decision. It is also instructive to use a similar analytical framework when undertaking more serious decisions such as whether to pursue more education, whether to pursue marriage, or whether one investment should be made over another.

Conclusion

Overall, the concept of opportunity cost is very useful in understanding the explicit and implicit costs associated with decision making. Indeed, opportunity cost played a pivotal role in this paper’s decision to attend one music concert over another, and could play a crucial role in other important life decisions.

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