opportunity cost: why it is so important martha rowland blenman college of business university of...
TRANSCRIPT
Opportunity Cost: Why it is so Important
Martha Rowland BlenmanCollege of Business
University of Michigan DearbornDecember 11, 2013
Definition?
• Formally: “The explicit cost of a resource plus the implicit cost of giving up the best alternative use” (Baye p. 5)• This follows from discussion of total costs in
production and resource allocation.• From a publically owned firm’s point of view,
their goal is to maximize shareholder value which implies efficient allocation of all resources.
From the firm’s point of view
• All resources are scare.• As the firm evaluates possible projects or lines
of business, understanding and estimating costs explicit & implicit are very important.
• Explicit cost determination uses accounting terminology and finance theory (time value of money) in indicate added value.
• Implicit cost or opportunity costs are included in this analysis and are very hard to determine.
Practical use of Opportunity Cost Concept!
• Once students understand that their whole life is about opportunity cost: the choices they make every day, they will see the amazing contribution to thinking(not just economic thinking), this concept brings.
• I believe this can be taught to very young elementary school students….I have done before.
Examples
• Allowance: how they spend it and when• Sleep or the lack of it!• Education choices• Purchasing a car• Purchasing clothing
Of course the list goes on and on.
References
• Managerial Economics and Business Stratey,8th edition, 2014, Michael R. Baye and Jeffry T. Prince. McGraw-Hill Irwin.
