I have seen opportunity costs followed by either ‘margin costs’ or even ‘marginal rate of substitution’ in parenthesesn ie. equated Is it correct to equate ‘opportunity costs’ with ‘margin costs’ or even ‘marginal rate of substitution’? Which if any of the above terms can be equated?
If a student in an Economics 101 course answered a question with “opportunity costs = margin costs” then I’d fail them.
‘marginal rate of substitution’ is a term I am not familiar with.
Opportunity cost is simply the cost of not being able to do something of value because you did something else instead. Going to college has an opportunity cost of not working and earning money. On the other hand, working instead of going to college may make you money now, but at the opportunity cost of getting an education that could benefit you even more later. It has nothing to do with margins.
If you don’t factor opportunity cost into decision-making, either on a personal or government level, you are likely going to make bad decisions.
Thanks penultima_thule.
A marginal rate of substitution means at what rate you’re willing to exchange good X for good Y. A classic example is beer vs pizza. Let’s say you could afford 6 beers or six slices of pizza. Well, there will be a rate in which you’re willing to substitute off that pizza for beer. That 3rd slice of pizza isn’t as appealing as the first bottle of beer. You probably don’t want all six beers nor all six pizza slices.
Opportunity costs see what you give up when you’re doing something. I’m on the SDMB which means I’m not doing anything else. I could be reading a book, making money working the door at a bar, or doing almost anything else. Instead, I’m waiting in my apartment for my friend on a badly delayed Amtrak train.
So in both cases (unless I 've misunderstood your MRS explanation) it seems you’re trading in one thing for another. So how would you explain the differnce? Is trading in X for Y and giving up X for Y not the same difference ?
The three terms mean completely different things.
Suppose that you were given a free ticket to the theatre. The cost of going to the theatre might, therefore, be nothing. But, what about what you might otherwise have been doing that evening - it could have been something that you valued very highly, such as . The opportunity cost of going to the theatre would be the value of what you had to give up to go there.
Now, suppose you were the manager of a factory. You produced widgets. Let’s say that to make an extra widget you need some materials and some labour - say $10 worth in total You don’t care about overheads such as rent or anything like that, as you don’t need to bother with them for just one extra widget.
The marginal cost of one extra widget is $10 in this example.
Now, suppose you are a consumer - let’s say for ice cream. You prefer vanilla to chocolate ice cream. But, you would, however,be indifferent between one vanilla ice cream or two chocolate. Your marginal rate of substitution is two vanilla for one chocolate.
Suppose I own a restaurant. My specialty is the Burger Cooked With Gas. I sell this item for $18 (it’s really good and comes with fries). The labor for the server and cook is fixed costs; I have to pay them whether I have customers in the restaurant or whether they are sitting idle. My rent, utilities, taxes, depreciation, etc., are also all fixed costs. My marginal cost is my cost to serve one additional Burger. For simplicity let’s say this is my raw material cost–cost of 6 oz. of hamburger meat, a bun, a potato, and condiments. Let’s say this is $6.
Now my brother walks into the restaurant and says, “Hey bro, I’m a little short today, how about a free burger?” So I order him up a burger on the house. And I tell him he’s a great brother and he’s worth $18.
My brother says, “Hey, look, it only cost you $6.”
But I say, “I could have sold that burger for $18. But I gave it away for free, so my opportunity cost is $18.”
Thanks Jamesc . The are indeed distinct terms. I see that now.
I recall from years gone by talking about Lost Opportunity Cost.
If you have £100 sitting in a bank earning 1% and leave it there, you have lost the opportunity to invest it in a safe but more rewarding place to earn 2.5%, or a risky place to earn (maybe) 5%.
For £100 the difference is trivial, but for £billions the lost opportunity would be considerable.
There’s also the spend vs save opportunity cost. When interest rates are high and rising, you have more of an incentive to save versus spend. I can use that £100 for a nice steak dinner tonight or save it. If I’m getting 0.25% interest, I’ve got a less incentive to save since I’m earning almost nothing. Interest rates at 12.50 percent means I’d be giving up a lot more in interest by buying that dinner and not saving.
That depends if the high and rising interest rates are also associated with high and rising inflation. If the prices you pay for goods and services are high and (more to the point) rapidly rising, then you have more of an incentive to spend all the money you get as fast as you can.