Friday, November 9, 2012

Opportunity Cost Examples, Passages, Quotes

Here are some passages and quotes on the opportunity cost concept.  I'm always looking to expand my collection so please feel free to share your favorite in a comment.

The opportunity cost concept is important because our spending (time/money) decisions input everything we know and value into the impossibly complex formula that determines how society's limited resources are used/allocated.  This is why markets produce the maximum possible value.  In order to fully appreciate why socialism does not work...the next time you go shopping just disregard everything you know and value.  Put things in your shopping cart that do not even vaguely match your preferences.  For example, if you're a vegetarian fill your shopping cart up with steaks.  

The more you understand the importance/relevance/significance of the opportunity cost concept...the more you'll appreciate the necessity of creating a market in the public sector (pragmatarianism FAQ).

Short and simple...
To get one thing that we like, we usually have to give up another thing that we like. Making decisions requires trading off one goal against another. - Greg Mankiw 
Long and simple...
First, economics is all about individuals. That is because economics is all about choice. We can’t have everything, so we have to choose which things are most important to us: would we prefer a new car, for example, or a summer holiday? To go out with friends, or to relax at home? Invariably, we have to give up one thing (an amount of money or time and effort, say) to get another (such as a new pair of shoes or a tidy garden). These are economic decisions – even when no money is involved. They are questions of how we juggle scarce resources (cars, holidays, company, leisure, money, time, effort) to best satisfy our many wants. They are what economics is all about. - Eamonn Butler, Austrian Economics
In economic terms...
The concept of opportunity cost (or alternative cost) expresses the basic relationship between scarcity and choice. If no object or activity that is valued by anyone is scarce, all demands for all persons and in all periods can be satisfied. There is no need to choose among separately valued options; there is no need for social coordination processes that will effectively determine which demands have priority. In this fantasized setting without scarcity, there are no opportunities or alternatives that are missed, forgone, or sacrificed. - James M. Buchanan
Also described as a "cross road situation"...
By contrast, if a consumer wants a new TV set and a new washing machine and he can afford only one of these without drawing on his savings (which he dislikes), he is in a cross-road situation. He must deliberate until he arrives at a decision as to which course of action he prefers. Thus, while we have reason to assume that preference functions for alternative uses of private funds (including the savings alternative) have some firmness and consistency, our findings raise doubt whether the corresponding concept of a preference function for alternative fiscal policies is fruitful. - Eva Mueller
The complexity of it all...
These extraordinarily complex micro-relationships are what we are really referring to when we speak of “the economy.” It is definitely not a single, simple process for producing a uniform, aggregate glop. Moreover, when we speak of “economic action,” we are referring to the choices that millions of diverse participants make in selecting one course of action and setting aside a possible alternative. Without choice, constrained by scarcity, no true economic action takes place. Thus, vulgar Keynesianism, which purports to be an economic model or at least a coherent framework of economic analysis, actually excludes the very possibility of genuine economic action, substituting for it a simple, mechanical conception, the intellectual equivalent of a baby toy. - Robert Higgs, Recession and Recovery 
As it relates to taxes...
But, besides all this, there is something which is not seen. The fifty millions expended by the State cannot be spent, as they otherwise would have been, by the tax-payers. It is necessary to deduct, from all the good attributed to the public expenditure which has been effected, all the harm caused by the prevention of private expense, unless we say that James B. would have done nothing with the crown that he had gained, and of which the tax had deprived him; an absurd assertion, for if he took the trouble to earn it, it was because he expected the satisfaction of using it, He would have repaired the palings in his garden, which he cannot now do, and this is that which is not seen. He would have manured his field, which now he cannot do, and this is what is not seen. He would have added another story to his cottage, which he cannot do now, and this is what is not seen. He might have increased the number of his tools, which he cannot do now, and this is what is not seen. He would have been better fed, better clothed, have given a better education to his children, and increased his daughter's marriage portion; this is what is not seen. He would have become a member of the Mutual Assistance Society, but now he cannot; this is what is not seen. On one hand, are the enjoyments of which he has been deprived, and the means of action which have been destroyed in his hands; on the other, are the labour of the drainer, the carpenter, the smith, the tailor, the village-schoolmaster, which he would have encouraged, and which are now prevented - all this is what is not seen. - Frédéric Bastiat, The Seen vs the Unseen
As it relates to economic imperialism...
A corollary of maximization is that on the margin, there are always tradeoffs.  The notion that there is no free lunch is central to economics.  The simple, but crucial concept of opportunity cost lies behind much of the ability of economics to extend into other areas.  Sometimes the tradeoffs are subtle.  Prices and costs are not necessarily parameters that are observed in market data, but they affect behavior nonetheless.  Other social sciences do not place the same weight on explicit recognition of the tension between costs and benefits, which reduces the ability of these fields to grapple systematically with social phenomena.  Thinking about tradeoffs gives rise to related thoughts on substitutability.  Economists place emphasis on choice.  Things are not technologically determined.  This is true for consumers and producers alike.  There is no fixed number of jobs.  Firms can trade off between employing labor and capital and workers can choose between labor and leisure. - Edward Lazear, Economic Imperialism
In terms of conservation...
The economic approach stresses the fact that any expenditure always has an opportunity cost, i.e. a benefit that is sacrificed because money is used in a particular way.  For example, since biodiversity is threatened by many factors, but chiefly by changes in land use, measures of value denominated in monetary terms can be used to demonstrate the importance of biodiversity conservation relative to alternative uses of land.  In this way, a better balance between 'developmental' needs and conservation can be illustrated.  To date, that balance has tended to favour the conversion of land to industrial, residential and infrastructure use because biodiversity is not seen as having a significant market value.  Economic approaches to valuation can help to identify that potential market value, whilst a further stage in the process of conservation is to 'create markets' where currently none exist.  Market creation is the subject of a separate OECD initiative (OECD, forthcoming). - David Pearce, Dominic Moran, Dan Biller, Handbook of Biodiversity Valuation A Guide for Policy Makers
From the same source...
Individuals express preferences about changes in the state of the world virtually every moment of the day.  The medium through which they do this is the market place.  A vote for something is revealed by the decision to purchase a good or service.  A vote against, or an expression of indifference, is revealed by the absence of a decision to purchase.  Thus the market place provides a very powerful indicator of preferences. 
I highly recommend clicking through every instance of "opportunity cost" in this source... Handbook of Biodiversity Valuation A Guide for Policy Makers

My favorite...
By preferring my work, simply by giving it my time, my attention, by preferring my activity as a citizen or as a professional philosopher, writing and speaking here in a public language, French in my case, I am perhaps fulfilling my duty. But I am sacrificing and betraying at every moment all my other obligations: my obligation to the other others whom I know or don’t know, the billions of my fellows (without mentioning the animals that are even more other others than my fellows), my fellows who are dying of starvation or sickness. I betray my fidelity or my obligations to other citizens, to those who don't speak my language and to whom I neither speak or respond, to each of those who listen or read, and to whom I neither respond nor address myself in the proper manner, that is, in a singular manner (this is for the so-called public space to which I sacrifice my so-called private space), thus also to those I love in private, my own, my family, my son, each of whom is the only son I sacrifice to the other, every one being sacrificed to every one else in this land of Moriah that is our habitat every second of every day. - Jacques Derrida
How many of you caught the reference to Moriah? That's an example of partial knowledge. Moriah is where Abraham was about to sacrifice his only son Issac.

Here's a Christian's perspective on Derrida's perspective...
It is through the gaze of my extinguished self that I realize the limitations that make scarcity necessary. Through this gaze into my own limitedness - a limit always established by the impending cessation of space and time for me - through this gift of death, I discover in nature the best way to be efficient. Thanks to death I must choose x rather than y. This has become a feature of 'nature' - a demystified 'nature' that bears no possibility of participation in the eternal. This is consistent with capitalism. - D. Stephen Long
Again from Derrida...
Sacrifice will always be distinguished from the pure gift (if there is any). The sacrifice proposes an offering but only in the form of a destruction against which it exchanges, hopes for, or counts on a benefit, namely, a surplus-value or at least an amortization, a protection, and a security. - Jacques Derrida
From the bible...
For what shall it profit a man, if he shall gain the whole world, and lose his own soul? - Mark 8:36
Again from the bible...
For God so loved the world, that he gave his only begotten Son, that whosoever believeth in him should not perish, but have everlasting life. - John 3:16
From Greek mythology...
‘Hercules, (says she,) I offer myself to you, because I know you are descended from the gods, and give proofs of that descent by your love to virtue, and application to the studies proper for your age. This makes me hope you will gain, both for yourself and me, an immortal reputation. But before I invite you into my society and friendship, I will be open and sincere with you, and must lay down this as an established truth, that there is nothing truly valuable which can be purchased without pains and labour. The gods have set a price upon every real and noble pleasure. If you would gain the favour of the deity, you must be at the pains of worshiping him; if the friendship of good men, you must study to oblige them; if you would be honoured by your country, you must take care to serve it. In short, if you would be eminent in war or peace, you must become master of all the qualifications that can make you so. These are the only terms and conditions upon which I can propose happiness.’ - Joseph Addison
The opportunity costs of war...
Every gun that is made, every warship launched, every rocket fired signifies, in the final sense, a theft from those who hunger and are not fed, those who are cold and are not clothed. This world in arms is not spending money alone. It is spending the sweat of its laborers, the genius of its scientists, the hopes of its children. The cost of one modern heavy bomber is this: a modern brick school in more than 30 cities. It is two electric power plants, each serving a town of 60,000 population. It is two fine, fully equipped hospitals. It is some fifty miles of concrete pavement. We pay for a single fighter plane with a half million bushels of wheat. We pay for a single destroyer with new homes that could have housed more than 8,000 people. This is, I repeat, the best way of life to be found on the road the world has been taking. This is not a way of life at all, in any true sense. Under the cloud of threatening war, it is humanity hanging from a cross of iron...Is there no other way the world may live? - Dwight D. Eisenhower
More on the opportunity costs of war from the father of modern economics...
But had not those wars given this particular direction to so large a capital, the greater part of it would naturally have been employed in maintaining productive hands, whose labour would have replaced, with a profit, the whole value of their consumption. The value of the annual produce of the land and labour of the country would have been considerably increased by it every year, and every year's increase would have augmented still more that of the following year. More houses would have been built, more lands would have been improved, and those which had been improved before would have been better cultivated, more manufactures would have been established and those which had been established before would have been more extended; and to what height the real wealth and revenue of the country might, by this time, have been raised, it is not perhaps very easy even to imagine. - Adam Smith, The Wealth of Nations
Price tags....
The price of anything is the amount of life you exchange for it. - Henry David Thoreau
More price tags...
 Wishes cost nothing unless you want them to come true. - Frank Tyger
Sayings....
  1. Actions speak louder than words
  2. Have one's cake and eat it too 
  3. Put your money where your mouth is 
  4. There ain't no such thing as a free lunch 
Funny...
If you combined the time you waste cutting grass with the time you waste shaving your face, we'd be goin' to Venus, you know, we could be doin' whatever. - Jase Robertson (Duck Dynasty)
More popular culture...
The loony music video “Gangnam Style” surpassed two billion views on YouTube this week, making it the most watched clip of all time. At 4:12 minutes, that equates to more than 140m hours, or more than 16,000 years. What other achievements were forgone in the time spent watching a sideways shuffle and air lasso? It took 50m man-hours to complete the “supercarrier” USS Gerald Ford last year. Had people not been watching PSY—the South Korean pop star who released the song in July 2012—they could have constructed three such ships. Alternatively they could have built more than four Great Pyramids of Giza, or another Wikipedia, or six Burj Khalifas in Dubai (the world’s tallest building). The song’s nearest rival is Justin Bieber’s “Baby”, at a paltry one billion views. The opportunity cost of watching PSY’s frivolity is huge, but humanity has at least been entertained. - The Economist, The hidden cost of Gangnam Style 
Creative destruction...
But have you ever asked yourselves sufficiently how much the erection of every ideal on earth has cost? How much reality has had to be misunderstood and slandered, how many lies have had to be sanctified, how many consciences disturbed, how much "God" sacrificed every time? If a temple is to be erected a temple must be destroyed: that is the law - let anyone who can show me a case in which it is not fulfilled! - Friedrich Nietzsche

1 comment:

  1. Warren Buffett: Charlie and I view our cost of capital as what can be produced by our second best idea.

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