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My Two Cents

Opportunity Cost–and Pretty Little Mistakes

Chris Farrell May 6, 2007

In The Economic Naturalist, a new book by Cornell University economist Robert Frank, he describes the concept of “opportunity cost” as one of the two or three most important ideas in economics. Yet Frank notes that tests and surveys suggest that students don’t understand the idea, and that their instructors may not have mastered the concept either. The idea is often taught in a boring manner, too.

Whenever you make a decision to do something, you foreclose other options. “The opportunity cost of engaging in an activity is the value of everything you must give up to pursue it,” writes Frank.

Opportunity cost is a measure (albeit a very imprecise one) of what we have given up, and it helps us better understand the return we expect from our choices. The late Robert Eisner, an economist at Northwestern University, somewhat tongue-in-cheek illustrated the notion of opportunity cost this way. The cost of buying and reading his book–The Misunderstood Economy–was not only the dollars spent on it but also the value of time spent reading it and the alternative uses of that time. In other words, his book should only be read if you believe your return, both in enlightenment and enjoyment, exceeds its opportunity cost, that is, money spent on the book and the time required to read it. (By the way, Eisner’s book is still worth reading. His chapter on the common belief that there is natural rate of unemployment and whenever it’s breached inflation isn’t far behind is devastating toward the concept.)

The same opportunity cost dynamic is at work when a student not only pays for four years of college but also doesn’t earn a steady income during those years. Again, she must believe the monetary reward and intangible benefits exceed the opportunity cost.

Well, I have a suggestion for teaching students the basic idea. It’s Pretty Little Mistakes: One Beginning, 150 Endings: The Choice is Yours by Heather McElhatton, a public radio independent producer. The clever premise is that you’ve graduated from high school, and now you have some big choices to make. If you decide to go to college, go to page 8; if you decide to drive to California, head to page 9. And so on for 501 pages and 215 chapters. It’s a fun read, humorous, raunchy and, at times, touching.

Of course, the short vignettes aren’t just about opportunity cost. It’s about chance and uncertainty, the odd twists and turns of fate we never anticipate, when making a decision as momentous as marriage or as simple as deciding to smile at a stranger walking by.

Still, who knew that learning about the concept of opportunity cost could be this much fun.

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