ECON 1002 Week 1 Opportunity Cost Discussion Post Example

Week 1 Discussion: Opportunity Cost in a Choice of Your Own

A $300 Refurbished Bicycle or Twelve Monthly Bus Passes: Pricing What the Bicycle Pushed Aside, Including Reading Time, Dry Winter Mornings and a Lock That Should Not Have Counted

Last August I spent about $300 on a refurbished commuter bicycle instead of renewing twelve monthly bus passes, which would have cost roughly the same. At the register the two options looked equal. They were not.

Opportunity cost is the value of the next-best alternative given up when a choice is made (Greenlaw et al., 2022). My next-best alternative was the bus, so the cost of the bicycle is everything the passes would have given me. Some of it has no price. On the bus I read for about forty minutes a day, which over a year is roughly 150 hours of reading I traded for riding. In January and February I arrived at work dry and warm; on the bicycle I arrived wet on at least a dozen mornings and once skipped a shift meeting to change clothes. The passes also came with no repair bills, while the bicycle has needed two tubes and a chain, about $45 so far. Shoppers often fail to think about opportunity cost unless it is pointed out to them (Frederick et al., 2009), and I was no exception. I also have to admit that a $40 lock I had bought the year before nudged me toward the bicycle. That money was already spent and gone whichever way I chose, so it was a sunk cost and should not have counted, but it did; Arkes and Blumer (1985) found that people regularly let past spending steer new choices.

My decision still rests on one assumption: that an hour of cycling, with the exercise and the freedom to leave when I like, is worth more to me than an hour of reading on the bus. If that is wrong, the bicycle cost me more than the passes would have, even though the receipts say they were the same. Mankiw (2021) puts it simply: the cost of something is what you give up to get it, and the receipts only tell part of that story.

What purchase of yours looked like a fair trade at the price but hid a cost you only noticed later?

Reply to Janelle

Janelle, your choice to take a weekend catering job instead of studying for your accounting exam is a clear opportunity cost example, and you priced the lost study time well. One more cost may be worth adding: if the lower grade means retaking the course, the opportunity cost includes the tuition and the time of a second attempt, which could exceed the $220 you earned. Did you think about that risk when you said yes to the shift?

Reply to Marcus

Marcus, you said buying a used car for $6,000 had no opportunity cost because you paid cash from savings. I would push back gently. The savings could have earned interest or covered the emergency fund you mentioned wanting, so the forgone interest and the security of that cushion are both part of the cost. Greenlaw et al. (2022) note that money already in hand still has alternative uses, which is exactly why paying cash is not free. What would you have done with the $6,000 otherwise?

References

Arkes, H. R., & Blumer, C. (1985). The psychology of sunk cost. Organizational Behavior and Human Decision Processes, 35(1), 124-140. https://doi.org/10.1016/0749-5978(85)90049-4

Frederick, S., Novemsky, N., Wang, J., Dhar, R., & Nowlis, S. (2009). Opportunity cost neglect. Journal of Consumer Research, 36(4), 553-561. https://doi.org/10.1086/599764

Greenlaw, S. A., Shapiro, D., & MacDonald, D. (2022). Principles of microeconomics (3rd ed.). OpenStax. https://openstax.org/details/books/principles-microeconomics-3e

Mankiw, N. G. (2021). Principles of microeconomics (9th ed.). Cengage Learning.