The concept of opportunity cost can be illustrated through the eyes of a small child. Suppose that a young girl named Amber receives a $30 gift certificate from her grandparents to be used at Toys4Me. The grandparents take the girl to the store, where she spots several toys she would like—all priced above $30. After gaining a sense of what is affordable, Amber narrows her focus to small stuffed animals ($10 each) and picture books ($5 each). The grandparents tell Amber that she can buy three stuffed animals, six books, or some limited combinations of the two items. She initially settles on one stuffed animal at $10 and four picture books at $5 each. The grandparents assure her that this selection works; it will exactly use up the $30 certificate. Amber takes the goods to the checkout counter. But while waiting to pay, she changes her mind. She decides she wants another stuffed animal because they are so cute. What should she do? The grandparents tell her to go pick out a second stuffed animal and then return two of her four books to the shelf. She makes the exchange, ending up with two stuffed animals at $10 each and two picture books at $5 each. From an adult’s perspective, the second stuffed animal cost $10. But in the eyes of the child, it cost two picture books. To get the second stuffed animal, Amber had to give up two books. That sacrifice was the opportunity cost of her last-minute decision. Amber’s way of looking at cost is one of the fundamental ideas in economics.

Photograph courtesy of: (c)Russell Illig/Photodisc # LS002234;

2.2 Opportunity cost of college button

College education is an enriching personal experience and, on average, people who have college degrees earn 50 percent more than high school graduates. "Go to college, stay in college, and get a degree" is sound advice for those who can handle the college curriculum. So does that mean that Bill Gates, Ken Griffey, Jr., and Kobe Bryant made wrong choices? Should Gates, the co-founder of Microsoft, have stayed in college rather than dropping out? Should Griffey, Jr. (baseball) and Bryant (basketball) have gone to college rather than beginning their careers directly after high school? Going to college is a personal decision involving future benefits and present costs. The future benefits are higher expected lifetime earnings, on average. The present costs include direct costs, such as tuition and books, and the indirect costs of forgoing income could be earned as a full-time worker with a high school diploma. For most college students, the indirect cost—or opportunity cost—is substantial, but not huge. They attend college and stay there, as long as they pass their courses. Gates in contrast, faced gigantic opportunity costs if he stayed in college. He recognized that he needed to quickly establish his software company to get a head start on others. His opportunity cost of staying in college might have been the missed opportunity of establishing Microsoft. Griffey, Jr. and Bryant, too, faced very large opportunity costs. They would have sacrificed very large salaries over the four years of college and also would have shortened the total length of their professional careers. Each quickly became a superstar, with a superstar salary and lucrative product endorsements. Gates, Griffey, and Bryant understood the idea of opportunity costs and they each incorporated it into their decisions. In retrospect, they made good choices.

Photograph courtesy of: (c)AFP/Corbis;