Opportunity Cost - Opportunity Costs in Consumption

Opportunity Costs in Consumption

Opportunity cost is assessed in not only monetary or material terms, but also in terms of anything which is of value. For example, a person who desires to watch each of two television programs being broadcast simultaneously, and does not have the means to make a recording of one, can watch only one of the desired programs. Therefore, the opportunity cost of watching Dallas could be not enjoying the other program (such as Dynasty). If an individual records one program while watching the other, the opportunity cost will be the time that the individual spends watching one program versus the other. In a restaurant situation, the opportunity cost of eating steak could be trying the salmon. The opportunity cost of ordering both meals could be twofold: the extra $20 to buy the second meal, and his reputation with his peers, as he may be thought of as greedy or extravagant for ordering two meals. A family might decide to use a short period of vacation time to visit Disneyland rather than doing household improvements. The opportunity cost of having happier children could therefore be a remodeled bathroom.

In environmental protection, opportunity cost is also applicable. This has been demonstrated in the legislation that required the carcinogenic aromatics (mainly reformate) to be largely eliminated from gasoline. Unfortunately, this required refineries to install equipment at a cost of hundreds of millions of dollars – and pass the cost to the consumer. The absolute number of cancer cases attributed to exposure to gasoline, however, is low, estimated a few cases per year in the U.S. Thus, the decision to require fewer aromatics has been criticized on the grounds of opportunity cost: the hundreds of millions of dollars spent on process redesign could have been spent on other, more fruitful ways of reducing deaths caused by cancer or automobiles. These actions (or strictly, the best one of them) are the opportunity cost of reduction of aromatics in gasoline.

The Opportunity Cost of consuming good y, relative to good x (y:x), can be calculated by the price of good y, relative to good x (Py/Px). For example, a movie (good x) costs $10 (Px) and bowling (good y) costs $20 (Py), the opportunity cost of going bowling is 2 movies (Py/Px = 20/10). That is the $20 spent on bowling could have been used to see two movies priced at $10. Conversely the opportunity cost of going to watch a movie is 0.5 (10/20) games of bowling. Units should be specified in the opportunity cost, for example if forgoing 3 party invitations to go out on a date you would not say "I passed on 3 for this date", your date would need to know the units of the good forgone for the statement to make sense.