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Unformatted text preview: nity cost of your choosing to buy a
sweater is two compact discs. (See Exhibit
1-1 for more examples.)
Economists often say that life is full of
trade-offs. What do they mean by this statement? The nature of a trade-off is that you
can get more of one good, but only by getting less of another good. Speaking about
trade-offs is just another way of speaking
about opportunity cost. In other words, saying that “life is full of trade-offs” is really no
different from saying that “every time we
choose one thing over another, we incur an
opportunity cost.” (You will read more
about trade-offs in the next section.) opportunity cost
The most highly valued
opportunity or alternative forfeited when a
choice is made.
A situation in which
more of one thing necessarily means less of
something else. 8 QUESTION: Suppose I decide to spend $50 to buy some used car stereo speakers
from a friend. If I hadn’t spent the
money on the speakers, I could have purchased $50 worth of new clothes, or spent
$50 on a present for my girlfriend, or
given $50 to my mom’s favorite charity.
Because I could have done any of these Chapter 1 What Is Economics? ANSWER: No. It is necessary to differentiate between what you could have done
and what you would have done.
Opportunity cost refers to what you
would have done if you had not bought
the speakers. It’s your next best choice,
and only that choice. If you would have
spent the $50 on your girlfriend’s present,
then the present—and only the present—
is what you actually gave up to buy the
speakers. Your opportunity cost in this
case can only be $50 worth of opportunity, not $100, $150, or $200 worth. Opportunity costs affect people’s decisions every day. In fact, a change in opportunity cost can, and often does, change a
person’s behavior. Suppose Sunil has a parttime job at a local grocery store. Each day he
goes to work at 2 p.m. and leaves at 6 p.m.
Does he incur any opportunity costs when
he chooses to work each day between 2 and
6 p.m.? He certainly does; whatever he
would be doing if he weren’t working is the
opportunity cost of his working.
Now let’s increase the opportunity cost of
Sunil’s going to work. Suppose one day Sunil
is on his way to work when someone stops
him and offers to pay him $300 for doing an
easy task, but doing the task means that
Sunil will not be able to go to work that day.
What will Sunil do? Will he continue on his
way to work or take the $300 and not go to
work? An economist would predict that as
the opportunity cost of working at his parttime job increases, compared to the benefits
of working, Sunil is less likely to go to work.
According to how economists think about
behavior, whether it is Sunil’s or your own
behavior, the higher the cost of doing something, the less likely it will be done.
E X A M P L E : An economics professor at
a California college noticed that more students are absent from class when the surf is
good than when it isn’t. What might explain
these absences? Well, it turned out that quite
a few of the professor’s students were
surfers. When the surf is not good, the 01 (002-029) EMC Chap 01 11/17/05 4:03 PM Page 9 Why Didn’t
Chris Rock Go
to College? ??? C hris Rock was born on
February 7, 1966, in
Andrews, South Carolina. Many
of his early years were spent in
the neighborhood of BedfordStuyvesant in Brooklyn, New York.
He had two idols: one was boxer
Sugar Ray Leonard and the other
was comedian Eddie Murphy.
Realizing that he wasn’t much of a
boxer, Chris decided to become a
comedian, like Murphy.
One night, Eddie Murphy caught
Chris Rock’s act at a club. He was so
impressed with Rock that he cast him
in his 1987 movie, Beverly Hills Cop
2. In the early 1990s, Rock became a
regular on television’s Saturday Night
Live. He went on to become one of
America’s funniest comedians—doing
movies, HBO specials, and more.
Chris’s hard work and talent began
paying off for him financially, with his
earnings far exceeding that of the
While Chris Rock was pursuing
his comedy career, many people the same age were attending college. Why didn’t Rock go to college?
He certainly could have afforded the
tuition, and he would have been
accepted had he applied. Could it
be that the opportunity costs of
attending college were just too high
for Chris Rock? “We were so poor my daddy
unplugged the clocks when
we went to bed.”
To understand, think what it will
cost you to attend college. Let’s say
that room, board, tuition, books,
fees, and living expenses add up to
$20,000 a year. Multiplied by 4
years that comes to $80,000. Is
$80,000 really the full cost of your
attending college? What would you opportunity cost (for the surfer students) is
low and they are more likely to come to
class. After all, they’re not giving up any
good waves. But when the surf is good, the
opportunity cost for these students is high,
and they are less likely to come to class. In
other words, the more the students have to be doing if you didn’t go to college?
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