Hello! I am a Bullis Student Tutor.
In this video, we are going to learn about
three different costs in the study of
economics: economic cost, explicit cost, and
opportunity cost. Notice my repeating of
the word costs; a cost is an amount paid
or given up in order to get something.
Economics is a study of how we employ
our scarce resources, so every decision
we make comes with a cost. Opportunity
cost is, perhaps, the most important of
our three costs: it describes what is
given up or sacrificed to pursue a
given course of action. The opportunity
cost would be the next best alternative
to the decision that you make. Let's take
a look at an example -- you have one scarce
hour; in this hour, you can either choose
to work or sleep. Let's say you chose to
work. The opportunity cost of taking this
course of action would be sleeping. This
is because you gave up sleeping to
pursue work. If you were to have chosen
to spend that one hour sleeping, then the
opportunity cost of that choice would be
working; because you sacrificed working
to have that hour of sleep. I chose this
example to emphasize a second point: an
opportunity cost does not always need a
monetary value to it. Here's another
example of opportunity costs. Suppose you
prefer reading a book you already own to
watching TV, and that you prefer watching
TV to listening to music. If these are
your only three choices, what is the
opportunity cost to reading a book?
Option A) Watching TV and listening to
music, Option B) Watching TV, Option C)
listening to music, Option D) sleeping, Or
Option E) the price of the book. So, the
problem says you already own the book, so
the price of the book is not going to be
an opportunity cost. Sleeping is not
mentioned the problem - so we're going to
cut that one out as an opportunity cost,
as well. At this point, most people are
tempted to choose Option A) watching TV
and listening to music; however, let's
read the problem carefully.
Suppose you prefer reading a book you
already own to watching TV, and that you
prefer watching TV to listening to music.
The opportunity cost is of the next best
value; so if you didn't read the book, you
would choose to watch TV. And, if you
didn't watch TV, you'd choose to listen to
music. Music is your third option; it is
not the next best value. Therefore, the
opportunity costs of reading a book is
watching TV because that is your next
best value. Our next two costs are
explicit cost and our economic cost. To
put a definition to the name, our
explicit cost is the money spent on a
good or a service. Our economic cost is
the sum of the explicit costs and
opportunity costs; these are the total
cost given up. While these are quick
definitions, I'm sure you will get a
deeper understanding and our next
example problem. In this next example
problem, we will synthesize our knowledge
of economic cost, explicit cost, and
opportunity cost. You're trying to decide
whether to go to the Dominican Republic
for spring break or stay home and work
If you work, you will earn $16
$16 per hour for the 40-hour
workweek. If you go away, you will incur
the following cost: an airline ticket of
$620, a hotel of $750
$750, food charge of $425, and
incidentals of $150.
What is the opportunity cost of going on
this trip? So, if you chose to go on your
trip, the next best alternative was
working for $16 per hour and
a 40-hour workweek. For this, we can give
a monetary value to our opportunity
costs. You sacrificed $16 per
hour for 40 hours, which gives you an
opportunity cost of $640
$60. What is the explicit cost of
going on the trip? The explicit costs are
the costs incurred so the airline ticket
the hotel charge
the food charge and the incidentals
which would give you an explicit cost of
$1945 -- and the economic cost is the
explicit costs and the opportunity costs
combined -- so our opportunity cost is $640
$640. Our explicit costs is $1,945
$1,945 and the sum of tha,t which will
give you our economic costs, is $2,585
$2,585. And there you have the cost of
your trip to the Dominican Republic. This
has been a Bullis Student Tutors video.
If you enjoyed this video, please be sure
to check out the rest of the videos on
our page. Thanks for watching!!!
