If we took them all into account our costs would be infinite.Ĭonsider the two options side by side.
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It is important to note that the implicit costs are the benefit of the next best option. There are an infinite number of things we could be doing with our time, from watching a movie to studying economics, but for implicit costs we only consider the next best. This is your implicit cost for clubbing, or the cost that has been incurred but does not result in a direct payment. For 5 hours of clubbing, you are forgoing the opportunity to earn $75 ($15 * 5). This makes it easy to put a dollar amount on your time. How do we measure time? Simple – what else could we be doing with that time? Assume you also work as a server at the campus pub, where you get paid $15 an hour (including tips). But what about our time? We must consider time as another cost of the action. An explicit cost represents a clear direct payment of cash (whether actual cash or from debit, credit, etc). With that analysis it seems like you should go, but so far we have only considered the explicit costs of the experience. Suppose the costs of going clubbing are $50 ($15 cover, $20 for drinks and $15 for a ride home). Seem high? If you have gone clubbing, this is likely close to what you paid for it. What if your friends were to ask you if you want to go out to the club? How much do you value it? As economists, we want to measure the happiness you will get from this experience by finding your maximum willingness to pay. Let’s say that for a 5 hour night at the club, the MOST you are willing to pay is $100. So how do you ‘spend’ your time? In economics, we want to place a value on each different opportunity we have so we can compare them. This isn’t meant to scare you, but rather to emphasize that a rational consumer doesn’t ignore time, but incorporates it into the analysis of any decision they make.
But there they are-fully countable-staring you in the face. Sometimes it kind of feels like our lives are made up of a countless number of weeks. What we are less good at considering is scarcity of time.Ĭonsider the following image that shows the number of weeks an average human lives. Normally we are quite good at considering scarcity when it comes to resources and money. In our introductory section we identified the concept of scarcity. An important part of being a rational decision maker is considering opportunity costs. Understand how sunk costs influence our decision makingĮconomics looks at how rational individuals make decisions.Calculate the opportunity cost of an action.Understand the three step process for making binary decisions.By the end of this section, you will be able to: