Macroeconomics concepts and applications

OPPORTUNITY COST (300 wds)

In 1914, a Viennese economist named Friedrich von Wieser introduced the concept of opportunity costs, to help provide a conceptual mechanism to help calculate the truest and most meaningful costs of business-related and other economic decisions (Mankiw, 2008). In principle, the term opportunity cost refers to the amount of money that is lost (or not earned) when one makes a choice between two options. For example, if one decides to spend the summer vacation in school instead of working at a job earning "X" amount of dollars per week for eight weeks, the cost of going to school would be the amount of money actually spent on tuition, transportation, and books (etc.) plus the opportunity costs of $8X because that is the amount of money that the person would have earned during the same eight-week period if he or she had chosen the other option of working during summer vacation (Mankiw, 2008).

Therefore, in the example of making the choice to spend five days of spring break working at home in Alabama for $200 per day or making the choice to spend the same week in Costa Rica at a cost of $700, the actual cost of the Costa Rican vacation would be the $700 spent on the trip plus the $1,000 that the person would have earned during the same time by working at home in Alabama for $200 per day instead of spending those five days of spring break in Costa Rica. Obviously, the concept of opportunity cost is very useful for making decisions (Mankiw, 2008) because at the end of the fiscal year, the person who chose to vacation for five days in Costa Rica would have $1,700 less in his or her bank account that the person who chose to stay home and work instead of going to Costa Rica. Without considering opportunity costs, a person could make the mistake of considering only the actual cost of the Costa Rico trip and never realize that the decision would actually cost an additional $1,000 compared to the alternative choice being considered.