Opportunity Costs Activity

OPPORTUNITY COSTS ECONOMICS MR. SCHEEL OPPORTUNITY COST Should I go to work today? Should I go to college after high school? Should the government spend money on a new weapon system? These are decisions that are made everyday; however, what is the cost of our decisions? What is the cost of going to work, or the decision not to go to work? What is the cost of college, or not to go to college? Finally what is the cost of buying that weapon system, or the cost of not buying that weapon? In economics it is called opportunity cost. Opportunity cost is the cost we pay when we give up something to get something else. There can be many alternatives that we give up to get something else, but the opportunity cost of a decision is the most desirable alternative we give up to get what we want. Let’s look at our examples from above. If you have a job, what do you give up to go to work? There are many possibilities. I could sleep in. If it is a nice day I could take my dog to the park and play all day. Or, I could even spend the day looking for a better job right? I give up all of these things if I choose to go to work. What I get from working is a greater benefit than the cost of giving up these things. But, opportunity cost is the most desirable thing given up not the aggregate of the things we gave up. Let’s look at the college example. We are all told to go to college so you can get a good education and that will translate into a good job. How do we know that college is such a good thing? How much college do we need? Let’s look at some numbers from a 2002 study on education from the Institute of Government and Public Affairs: “There are distinct benefits of a college education. A study conducted in April of 2002, by the Institute of Government and Public Affairs for the Illinois Board of Higher Education, showed the following benefits: •

• • •

Higher Earnings - Earning a bachelor’s degree provides the average student with over $590,000 in future earnings. Similarly a professional degree provides a present value to the student of almost $1.25 million in future earnings. Labor force participation rates and employment rates for people aged 25 and over increase with increased levels of education. People with college experience contribute time and money to charitable causes at a higher rate than those with less education. Increased levels of education are associated with the increased likelihood of voting or registering to vote.

In addition, college can provide many other benefits that are less tangible, and will help your child become a better-rounded individual. Benefits include increased self-awareness,

the ability to think critically, and an opportunity to meet many different people. Overall, the entire college experience will provide your child with a lifetime of benefits”. As we can see there are many benefits to a college education. So what are the costs? There are monetary costs for sure. Also, we will spend four or more years going to classes. We could be working and earning money instead of going to college. Finally we will be giving up free time for study time that could be used to do other things. What about spending money on a missile defense system? In the fiscal year 2006 budget the taxpayers of Colorado will spend, as a fraction of overall federal spending, $150.7 million for the ballistic missile defense system (Center on Arms Control and Nuclear Proliferation). That same money could pay for 27,547 people to get health care (Centers for Medicare and Medicaid Data Compendium) or, 37,384 scholarships for university students (National Center for Education Statistics). These represent real choices that the government must make with our Tax dollars. The opportunity costs in this case depend upon what you value more military spending, health care, or college scholarships. Problem # 1 Let's say you have five dollars. What would you like to spend it on? There are a million things you would love to spend five bucks on, but let's imagine there are only three things out there you really want to buy: gum, soda, and movie tickets. Look at the price chart below and answer the questions. Good

Price

Gum

$ .50

Soda

$1.00

Movie Ticket

$5.00

Determine which good would be the best opportunity cost and why? (One sentence)

Problem # 2 A government has $100 million to spend. Three alternatives, each costing the same amount, are building a new hospital, and building a sports complex or upgrading highway infrastructure. If the government decides to upgrade highway infrastructure, the opportunity cost is not building the new hospital, or not building the sports complex. The decision to upgrade highway infrastructure means that these alternatives are not chosen. Create an opportunity chart and determine which of the following would be a better opportunity cost in one sentence?

Problem # 3 Teams generally do not have enough money to sign every player they want to a contract, although the New York Yankees are trying to prove otherwise. Had the Blue Jays offered salary arbitration to Jose Cruz, an arbitrator would have decided his salary for 2003. The best estimates available suggest that Cruz would have received $5 million for 2003 if an arbitrator determined his salary. If we believe this estimate and if the Jays had offered Cruz arbitration, the Jays would be required to retain Cruz and pay him $5 million for the season. This would be 5 million dollars that they Jays could not use for other purposes. If we look at the moves the Blue Jays have made over the winter, it seems that they used this $5 million to sign other players. The Blue Jays have signed 6 players to contracts who played elsewhere in 2002. The players and the salaries they will be paid in 2003 are as follows: Player Bordick, Mike Catalanotto, Frank Creek, Doug Myers, Greg Sturtze, Tanyon Tam, Jeff TOTAL

Position

Salary

Former Team

Shortstop

$1,000,000

Baltimore

Outfielder

$2,200,000

Texas

Pitcher

$ 700,000

Seattle

Catcher

$1,000,000

Oakland

Pitcher

$1,000,000

Tampa

Pitcher

$ 600,000

Oakland

6 PLAYERS $6,500,000

So the Jays have spent $6.5 million on players during this off-season. It is likely that, if the Jays were paying Jose Cruz $5 million for 2003, they would not have spent this $6.5 million on these six players. Explain why the blue Jays paid the better opportunity cost? (Two sentences)

Problem # 4 Develop your own personal opportunity cost chart. Include the following: -5 items -Costs -Benefits -Determine and explain your decision for choosing your opportunity cost