3. Opportunity Cost
Mario Villarreal-Diaz, a former Fulbright fellow, is professor and Research Chair in Strategic Intelligence at the Public Policy Graduate School at the Instituto Tecnológico y de Estudios Superiores de Monterrey.
Prof. Mario Villarreal-Diaz explains the scarcity inherent in our lives and how this necessarily implies a world of tradeoffs. In such a world, the pursuit of a choice requires forgoing all other potential choices. Opportunity cost is simply what is given up when a choice is pursued. This important concept provides guidance to individuals, companies, and policy makers as to where scarce resources will be more productive.
- Opportunity Cost [Article]: David R. Henderson covers the basics of opportunity cost and its connection to everyday action.
- A Fable of the OC [Article]: Michael Munger demonstrates the principle of opportunity cost through a story about purchasing expensive concert tickets.
- Opportunity Cost and Hidden Inventions [Article]: Dwight R. Lee, through a series of examples, shows that opportunity costs play a large role in decision making.
- Free Lunch Myth [Video]: Milton Friedman demonstrates that all types of government spending carry a cost.
- Why Soaking the Rich Won't Work [Video]: Milton Friedman explains how excessive taxation on the rich destroys wealth by reducing the amount of investment in the economy.
Use these questions to enhance your understanding of the topic. We recommend watching the featured video first; the suggested resources will also help.
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Comments
In the questions, why does the opportunity cost of attending college not include the sticker price? The money spend on tuition also had an alternative use. By going to college not only do I forgo wages, I also give up the ability to use my tuition money on something else. Isn't that an opportunity cost too?
Yes tuition spent is opportunity cost, however these are short videos meant to illustrate points and introduce us to concepts not list each and every example that can theoritcally be made.
That is a good question ggclass.
Thinking out loud here...
If I were to volunteer for one year, my opportunity costs would be the wages and work experience of one year.
Therefore, If I spent x dollars for one year of school, I would think that the cost of schooling would be included (perhaps housing would be not be an opportunity cost since I would be paying for housing in both situations) with the wages and work experience.
The opportunity cost of paying tuition could be the in the form of a down payment on a home, retirement savings (with early and compounding interest), or anything else.
I hope we can get some further assistance on that one.
Also, not just from the student's perspective but also the university's perspective, the tuition used to pay wages is a kind of opportunity cost---it covers the opportunity cost of the professors in spending their labor time at the university rather than elsewhere. Likewise for books, the forgone opportunity the student pays for is the labor time spent to write the books and the uses of paper (and other book-making materials) that are suppressed by the paper (etc.) being directed towards their use in books.