Opportunity cost and the real world

Is real-world decision making influenced by opportunity costs? Consider your own decision to attend college. Your opportunity cost of going to college is the value of the next best alternative, which could be measured as the salary you would earn if you had chosen to go directly into full-time work instead. Every year you stay in college, you give up what you could have earned by working that year. Typically, students incur opportunity costs of $80,000 or more in forgone income during their stay in college.

But what if the opportunity cost of attending college changes? How will it affect your decision? Suppose, for example, that you received a job offer today for $250,000 per year as an athlete or an entertainer, but the job would require so much travel that school would be impossible. Would this change in the opportunity cost of going to college affect your choice as to whether to continue in school? It likely would. Going to college would mean you would have to say goodbye to the huge salary you’ve been offered. You can clearly tell from this example that the monetary cost of college (tuition, books, and so forth) isn’t the only factor influencing your decision. Your opportunity cost plays a part, too.

Even when their parents pay all the monetary expenses of their college education, some students are surprised to learn that they are actually incurring more of the total cost of going to college than their parents. For example, the average monetary cost (tuition, room and board, books, and so forth) for a student attending college is about $10,000 per year (S40,OOO over four years). Even if the student’s next best alternative were working at a job that paid only $15,000 per year, over four years, that would amount to $60,000 in forgone earnings, So, the total cost of the student’s education would be $100,000 ($40,000 in monetary costs paid by the parents and $60,000 in opportunity costs incurred by the student).

Now consider another decision made by college students-whether to attend a particular class meeting. The monetary cost of attending class (bus fare, parking, gasoline costs, and so on) remains fairly constant from day to day. Why then do students choose to attend class on some days and not on others? Even though the monetary cost of attending class is fairly constant, a student’s opportunity cost can change dramatically from day to day.

Some days the next best alternative to attending class may be sleeping in or watching TV. Other days, the opportunity cost may be substantially larger, perhaps the value of attending a big football game, getting an early start on spring break, or having additional study time for a crucial exam in another class. As options like these increase the cost of attending class, more students will decide not to attend.

Failure to consider opportunity cost often leads to unwise decision making. Suppose that your community builds a beautiful new civic center. The mayor, speaking at the dedication ceremony, tells the world that the center will improve the quality of life in your community. People who understand the concept of opportunity cost may question this view. If the center had not been built, the resources might have funded construction of a new hospital, improvements to the educational system, or housing for low-income families. Will the civic center contribute more to the well-being of the people in your community than these other facilities? If so, it was a wise investment. If not, your community will be worse off than it would have been if decision makers had chosen a higher valued project.

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