Overview: Opportunity Cost
"The difficulty in life is the choices"

There is an old saying that there are two certainties in life - taxes and death. To this list I would add choices. Because we live in a democratic, capitalistic system, we will all be confronted with innumerable choices in our lifetimes and our success will be largely dependent upon the skill with which we make those choices.  Every four years many will decide on who to vote for in the presidential election, many high school students will be making a choice of college, and in the next few year many of you will be making a number of important choices  - a major field of study, an internship, and courses that help develop important life skills.

The fact is choices are inescapable - a by-product of scarcity - the result of a clash between our unlimited material wants and our limited resources.  During this semester you will be studying economics which is very simply the study of how society, businesses, and people deal with this problem of scarcity.  If things go well, it should help you this semester as you make a number of important choices regarding the allocation of your time and money.  Will you spend time studying ECN or socializing at a late night party?  Will you buy a text book or will you use your money to go out to dinner?   

And you are not the only ones making choices.  Firms will also be making choices - how much of the advertising budget should be devoted to print, how much devoted to TV time, and how much to the internet;  how much of their operating budget should be allocated to operating costs and how much to R&D (research and development).  Finally, you will see in the news discussions / debates on choices made at a national level - how much of government spending do we devote to defense and how much to environmental protection; how much do we spend on social security to provide financial support for the elderly, and how much on education that primarily benefits the young?

Given that economists have focused so much of their attention on studying choice, it is not surprising they have developed some concepts that prove helpful in analyzing choice situations. This is why in the first section  of this unit we will look at one of those concepts, Economic (Opportunity) Cost. Experience has shown this is a worthwhile endeavor since far too often decision makers base their decisions on out-of-pocket, or accounting costs, rather than on economic costs that should be the basis of decisions. To convince you of the importance of opportunity cost, as well as the scope of the potential difference between opportunity and accounting costs, you will be asked to compute the cost of a year's education.  What you will find is the cost of a year of school will not equal your tuition and fees and the cost will actually be different for each one of you. 

You will also be asked to work with a simple graphical model of choice - the Production Possibility Curves - in the second section. With this model we can examine explicitly the choices open to a decision maker and how the set of choices can be altered.  This discussion will introduce you to two key economic concepts, efficiency (static and dynamic) and specialization (division of labor).  In this section we will look at a number of examples, but we will focus our attention on two - the cost of an MBA degree and the alternatives to MORE. In the first example you will see how the University can raise the tuition for its Masters of Business Degree (MBA) at the same time students see the price falling - a real win-win situation. In the second you will use this model to help understand how war, productivity growth, and specialization can be viewed as alternative national expansion strategies.  This unit will conclude with a section Trade and Possibility Curves  where you will see how the production possibility curves can be employed to enhance one's understanding the concept of comparative advantage which is at the heart of much of the analysis of international trade.