Question

Please answer the following by commenting on how it pertains to your decision to take this class and why. Of course, you need to apply the “economics” behind a key term in the statement…

“By taking Microeconomics over the next 9 weeks, I have already determined that the opportunity costs in making this decision is/are…”

Explain what opportunity costs were pertinent in your decision making.

Answer 1

Economics looks at how rational individuals make decisions. An important part of being a rational decision maker is considering opportunity costs. In our introductory section we identified the concept of scarcity. Normally we are quite good at considering scarcity when it comes to resources and money. What we are less good at considering is scarcity of time.

Consider the following image that shows the number of weeks an average human lives. Sometimes it kind of feels like our lives are made up of a countless number of weeks. But there they are—fully countable—staring you in the face. This isn’t meant to scare you, but rather to emphasize that a rational consumer doesn’t ignore time, but incorporates it into the analysis of any decision they make.

So how do you ‘spend’ your time? In economics, we want to place a value on each different opportunity we have so we can compare them.

What if your friends were to ask you if you want to go out to the club? How much do you value it? As economists, we want to measure the happiness you will get from this experience by finding your maximum willingness to pay. Let’s say that for a 5 hour night at the club, the MOST you are willing to pay is $100. Seem high? If you have gone clubbing, this is likely close to what you paid for it.

Suppose the costs of going clubbing are $50 ($15 cover, $20 for drinks and $15 for a ride home). With that analysis it seems like you should go, but so far we have only considered the explicit costs of the experience. An explicit cost represents a clear direct payment of cash (whether actual cash or from debit, credit, etc). But what about our time? We must consider time as another cost of the action.

How do we measure time? Simple – what else could we be doing with that time? Assume you also work as a server at the campus pub, where you get paid $15 an hour (including tips). This makes it easy to put a dollar amount on your time. For 5 hours of clubbing, you are forgoing the opportunity to earn $75 ($15 * 5). This is your implicit cost for clubbing, or the cost that has been incurred but does not result in a direct payment.

It is important to note that the implicit costs are the benefit of the next best option. There are an infinite number of things we could be doing with our time, from watching a movie to studying economics, but for implicit costs we only consider the next best. If we took them all into account our costs would be infinite.