Economics

BBA 2501 Unit I Ch 2 Opportunity Cost

00:00:00 Well, hello class.

00:00:02 Welcome to this video on opportunity cost.

00:00:05 You should be well into the microeconomics now.

00:00:10 And I'm going to be introducing a concept that may be a little bit foreign to you in the beginning.

00:00:18 What does it cost?

00:00:21 Every day most of us make purchases, we may buy a shirt, we may order something online, we may buy something to eat.

00:00:29 When we see a price tag, we know that's what the item costs.

00:00:35 But in economics, the actual amount of money we have to pay for an item is recognized, but there's also unforeseen costs that are recognized as well.

00:00:46 Now, bear with me here.

00:00:49 To get something, we have to give something up.

00:00:53 When we make a decision, we do have to give something up.

00:00:58 For instance, if I want this new sports car, I'm gonna probably have to give up going to the beach vacations for probably the rest of my life.

00:01:11 Even my dog Luna, has to give something up.

00:01:15 As we all know, she loves to chase the cat.

00:01:18 Well, if she wants to chase our cat, She's gonna have to give up lounging by the pool.

00:01:29 All of this boils down to opportunity cost.

00:01:33 Opportunity cost tell us the value of what we had to give up.

00:01:38 Now, our textbook defines an opportunity cost as the value of the best alternative that is given up.

00:01:49 You're even incurring an opportunity cost right now.

00:01:54 Because you're here, staring off into space watching this video, You could be working and earning a little bit of more of money.

00:02:06 The money you could be earning as an opportunity cost for studying.

00:02:14 Now, let's look at how we actually calculate opportunity cost.

00:02:19 Well, first of all realize it's subjective.

00:02:23 If I give up going to the beach every year so I can purchase that new sports car, I may not know everything I'm giving up.

00:02:32 I know the cost of the trip, that one's easy.

00:02:35 I know how much it's gonna cost to get there.

00:02:39 But I may have run into a long lost friend while on vacation and I'm gonna have to give that up.

00:02:45 How do I value that?

00:02:48 Maybe I would have been discovered by a talent scout looking to create a calendar of economists on the beach, who knows?

00:02:54 And I could've gotten paid for it.

00:02:56 Maybe I would've dug up pirate treasure chest on the beach and been rich.

00:03:04 These, I will never know.

00:03:06 These are almost impossible to measure no matter how creative I get.

00:03:14 First of all, looking at opportunity costs and decisions.

00:03:20 You've probably considered opportunity costs your whole life whenever you've made decisions, probably without even knowing it.

00:03:29 For instance as a teenager, maybe you snuck out of the house.

00:03:35 The opportunity cost was getting caught and getting grounded.

00:03:41 These opportunity costs, well, they vary with circumstances too.

00:03:46 Most recently, I chose to work on putting this video together on a random Thursday, because our family had plans over the weekend.

00:03:55 My opportunity cost on Thursday was much lower, as there was nothing going on.

00:04:00 My opportunity cost of working over the weekend, well, that was being in the doghouse with my wife for not participating in the family plans.

00:04:09 There was really a no brainer here.

00:04:11 My opportunity cost was much lower on Thursday than on the weekend.

00:04:18 Even though opportunity costs are subjective, we can most of the time get a reasonable estimation of opportunity costs.

00:04:28 We only need to estimate what reasonable costs would be if we chose one alternative over another.

00:04:35 For instance, I could spend $5,000 today on traveling.

00:04:41 I could also invest that $5,000 in a savings account and earn 1% or even lower in interest.

00:04:48 My opportunity cost of going on the trip would be the $50 in interest I would be giving up.

00:04:55 Yes, in this case, I would definitely take the trip is that so petty low opportunity cost?

00:05:02 Let's look at another example here.

00:05:04 Let's say that we have both an American worker and a Canadian worker, and each one of those can produce 1 television per month.

00:05:15 Now, the American worker can produce 2 cars per month if they didn't wanna produce televisions, or the Canadian worker can produce 1 car per month.

00:05:29 We can determine the opportunity cost of producing 1 television or 1 car for each country.

00:05:36 Notice what happens.

00:05:38 The Canadian worker can produce either 1 car or 1 television.

00:05:43 So the opportunity cost for producing a television here, is the Canadian worker is gonna have to sacrifice producing 1 car.

00:05:53 The American worker on the other hand, they can produce 1 television per month or they can produce 2 cars.

00:06:00 So the opportunity cost for producing 1 television, is the American worker is going to have to give up producing 2 cars.

00:06:10 Now, looking at the opportunity cost of producing 1 car.

00:06:14 Well, the Canadian worker has to sacrifice 1 television.

00:06:19 But the American worker can produce 2 cars in a month.

00:06:25 So that means that to produce 1 car, the opportunity cost for producing 1 car is that they're gonna have to give up a 0.5 of a television.

00:06:38 Very important point here on these calculations, notice how they're made.

00:06:46 The interpretation here, is the Canadian worker has the lower opportunity cost for producing televisions and American worker has the lower opportunity cost for producing cars.

00:06:58 Again we have the table down here at the bottom, that shows you what each one of them are sacrificing.

00:07:05 And you can see that the opportunity cost for producing televisions is lower for the Canadians.

00:07:11 They have to sacrifice 1 car.

00:07:14 The opportunity costs for producing cars.

00:07:17 Well, the American worker has the advantage there because they only sacrifice a 0.5 of a television.

00:07:26 Here's another scenario.

00:07:27 Let's say that you could work overtime this weekend or go on a staycation at a local hotel.

00:07:33 If I work overtime, I'll earn an extra $1,000.

00:07:37 If I work overtime, I'm gonna have to pay $100 for food at home and entertainment for the weekend.

00:07:45 If I go to the local hotel for a staycation, it'll cost me $500 total for dining out, entertainment and the hotel.

00:07:56 How would I calculate my opportunity cost for going on the staycation?

00:08:03 Well, I would need to take into consideration the money I could earn if I stayed at home and worked.

00:08:10 I would need to take into consideration the cost of the food at home and entertainment for staying at home.

00:08:19 I would not need to consider the cost of the staycation itself, the dining out, entertainment and a hotel.

00:08:25 That $500, because remember I'm calculating only the opportunity cost of going on the staycation.

00:08:33 Therefore, I'm only looking at what I would be giving up by going away from home for the weekend.

00:08:41 The opportunity cost here would be the amount I could earn by staying at home which is $1,000, minus the $100 of cost for food and entertainment.

00:08:54 So my opportunity cost for going to the hotel for the weekend is $900.

00:09:01 Now here's my dog again, Luna, and she'd like to give you some highlights to this topic.

00:09:07 First, remember that opportunity costs represent the cost of something we're giving up whenever you make a decision.

00:09:14 Opportunity costs well, they can be subjective.

00:09:18 What is a high opportunity cost to some, may not be that high for others.

00:09:25 An opportunity cost is only found in economics, you will not find this concept in accounting, because there's no actual money that is changing hands.

00:09:36 It's only a concept in economics.

00:09:41 Something to think about as I leave you here.

00:09:43 There's an old saying, saying The lesser of two evils.

00:09:48 It means the less unpleasant of two choices, neither of which is any good.

00:09:55 Isn't this old saying really talking about opportunity cost?

00:09:59 I mean, think about it, we have two choices, both of them are unpleasant.

00:10:03 We're gonna select the choice that has the lowest opportunity cost.

00:10:08 I know, I know, don't laugh too much at me.

00:10:12 Economists do think about some weird things in their spare time, but when you hear this saying in the future, you're gonna probably think about economics.

00:10:22 I do appreciate you watching this video on opportunity cost.

00:10:26 I hope it helped you.

00:10:27 Please do take a look at it couple more times, particularly in the examples as I know you're gonna probably be using those in your assignments for the unit.

00:10:37 So I appreciate it, and we'll be talking to you next time

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