Every day, we have to make decisions, be it small, like trying a new soap, or huge, like moving abroad. Each such decision comes at a price. This price is the benefit we forego by not choosing the other option. Economists call these benefits “opportunity costs”. Although they are often less obvious and sometimes speculative, opportunity costs can be huge, therefore, learning about them makes sense! Watch our video to learn more about what opportunity costs are, how they work in real life, and how you can calculate the true costs of going to college.
the full story
Sometimes a new exciting opportunity presents itself, when we are completely happy about our existing life situation. If that happens, we are forced to think about opportunity costs. This is because when we look at the new opportunity, we compare it with our current situation and think about what is at stake if we would go for it. This often happens without us being able to see the full picture.
trade off concept
Economists define opportunity cost as the benefit we forego, as we trade-off one alternative to keep another. — hoping we make the best choice.
Although they are often less obvious and sometimes speculative, opportunity costs can be huge, therefore, learning about them makes sense.
calculate true cost of college
Imagine that we are trying to calculate the true cost of going to college. One factor can be tuition, which in our case is 10,000 dollars. Since that’s our only cost, you might conclude that the cost of college is 10,000 dollars a year. But to economists, that’s not quite right. Because we have to add the money we could have earned by working, instead of attending college.
Let’s say that by working full-time in a local restaurant, you can earn $20,000 a year . The true costs of going to college are, therefore, $10,000 tuition plus $20,000 in opportunity costs. By studying for a degree, we trade off 30,000 dollars a year. Although, that’s only half the story because it also goes the other way around.
opportunity cost of college
Assuming we go to college for four years, we trade-off $120,000 for an education that leaves us with empty pockets, many ideas and a degree. However, once we are better educated, we might be able to make $40,000 as managers instead of the $20,000 in service. In such a case, not going to college ends up being much more expensive.
Do you think you understand the concept? Show us!
Calculate the opportunity costs of a high school student who drops the idea of earning a degree in medicine, and instead chooses to help in the family business. The cost for tuition and living is $2,000 a month. It takes a total of 6 years to finish university. After obtaining her degree she works in the field of medicine for 34 years earning $10,000 a month and spending $3,000 on monthly living expenses. If she is entering the family business she earns $3,500 a month right away for the next 40 years with zero living expenses.
What’s financially the better choice? Post your calculations in the comments below!
- Listen to this podcast with Michael Munger of Duke University and Russ Roberts talk about the economics of ticket scalping, gifts, and opportunity cost.
- Read about Sunk cost.
- Read about opportunity cost, how investors define it.
Exercise 1: The costs of dropping out of college
Let your class calculate the opportunity costs of a high school student who thinks about dropping out of college to help in the family business instead:
- The cost of tuition and living is $2,000 a month.
- It takes a total of 6 years to finish university.
- After obtaining a degree the student can work in the field of medicine for 34 years earning $10,000 a month and spending $3,000 on monthly living expenses.
- If the student is entering the family business he or she earns $3,500 a month right away for the next 40 years with zero living expenses.
What is the cost of dropping out of college?
Exercise 2: The cost of a meal with a friend
To better understand the concept of opportunity cost beyond monetary values, think about the last time you had a meal with a friend. Now imagine that in an alternate reality you did not go grab that meal with that particular friend, but did something else instead. For both realities, write down what you liked about it in one column, and what you didn’t like in another column, and compare the two. What you did not like about having that meal with your friend and what you missed out on by not doing something else represent the cost you “paid” for having the opportunity to have that meal with that friend at that time.
Was it worth it?
Can you think about the opportunity cost of the following activities:
- Brushing your teeth
- Spending time with your family
- Watching your favorite show
Let us know in the comments.