Give an example of how the Principle of Opportunity Cost applies to your life. T

Question

Give an example of how the Principle of Opportunity Cost applies to your life. Think of a recent decision you made. It could be a decision as simple as whether to eat out or cook your own dinner, or it could be a decision to quit your job and go back to school. What alternatives did you consider? How did you arrive at your final decision? Did you implicitly weigh marginal cost and marginal benefit? How does the concept of opportunity cost apply to production possibilities curve (PPC) analysis? How can we use PPC analysis to examine what we do?

Explanation / Answer

Time to rewind back to Economics 101. The beautiful topic of Economics is based on the principal of scarcity: we have a limited amount of time and resources available to us and must make choices of how to allocate what we DO have. In college, this means balancing the 3 S’s: Sleep, Studying and Socializing. Take a look at the following three principles and think about how you can apply them to your own life. Opportunity Cost This balancing act presents an opportunity cost: what you need to give up to attain what you want. For example, you can choose to study for an exam or go party with friends. If you choose to study, your opportunity cost is partying with friends. Opportunity costs do not always have a monetary value associated with them, rather, the cost is: anything of value to the person assessing the situation including energy and time. Sunk Costs Sunk Costs are costs that are already incurred and cannot be changed regardless of what action we take. For example, a gym membership that you’ve never used or a car you’ve already purchased. A dangerous trap is the irrational thinking of “well, I’ve already put so much money and time into this so I might as well just keep going.” In many cases, this type of thinking leads to throwing “good money at a bad investment.” The Law of Diminishing Returns The law of diminishing returns states that if one factor of production is increased while the others remain constant, the overall returns will relatively decrease after a certain point. “For example, if more and more laborers are added to harvest a wheat field, at some point each additional laborer will add relatively less output than his predecessor did, simply because he has less and less of the fixed amount of land to work with.”

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