Sunday, October 9, 2011

Opportunity Costs

The idea that every decision we make has an opportunity cost is fundamental to economic theory, but at the same time it seems to be difficult for many people who have not been exposed to economics to fully comprehend. The fact that people ignore the opportunity cost of keeping an unwanted Christmas gift seems to suggest that people are irrational, or that economists are unable to measure all of the factors that go into an individual’s decision making. In my opinion, it is probably a mixture of both.

When someone receives an unwanted gift, which I’ll define as one that they would never purchase themselves, the “economically efficient” thing to do would be to sell the gift at the market price. It would seem irrational for a person not to sell the unwanted gift at the market price because they are incurring an opportunity cost equal to the market price of the gift by keeping it. However, the fact that most people probably do not return every unwanted gift might suggest that there are other factors to consider in addition to monetary opportunity costs. Perhaps there are opportunity costs greater than the cost of the gift, such as the cost of offending the gift giver, that economists are unable to measure and therefore might mistakenly identify as irrational behavior.

1 comment:

  1. First off, intriguing post. Great topic for discussing opportunity cost.

    Now, you say that a person is incurring the opportunity cost of the market price of the gift. That brings up the question: Does somebody incur opportunity cost when they make no actions?

    I would argue they do not. I would argue that for opportunity cost to be incurred one of the necessitating factors would be that the person is currently consuming some opportunity instead of another. That is to say that when somebody gets a gift and (1) doesn't use it + (2) doesn't sell it then the gift has zero overall stimulation: neither negative or positive. Given the same amount of investment (none) it is impossible to create any more stimulus, and so they have maximized their opportunity in the domain of this system. Now lets say they decide to go sell it, this means they are now making an investment of some time to make some amount of money. The opportunity cost of this would be the actions taken instead of selling the gift, not doing nothing about the gift altogether.

    Does this make sense?