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Jessica receives her early Christmas bonus amounting to P120000 from her company. She had considered saving some of her earnings and purchasing new bags or a laptop with this situation, she made two options: A. 50% will be placed in a bank at a 0.015% interest rate, with the remaining 50% going toward the purchase of a brand new laptop. B. 70% will be placed in a bank at a 0.01% interest rate, with the remaining 30% going toward purchasing brand new bags. she decided to select option B 1. Enumerate in particular the explicit and implicit cost 2. Calculate the total cost and total opportunity cost in the selection she made. Opportunity Cost and The Economic Problem The economic problem can be illustrated with the concept of opportunity cost. Opportunity cost is the next best alternative foregone. A consumer with a limited income of $20,000 year continually faces choices, if they spend $3,000 on a new car, then that is $3,000 they cannot spend on food and drink Economic Choice? Economic choice - is deciding between different uses of scarce resources Opportunity cost - is the benefit that is lost in making a choice between two competing uses of scarce resources. Economists use a special language to analyze issues, prepare forecasts and render opinions regarding the economy. One very important concept that they use frequently is opportunity cost These are different than explicit costs that are visible costs and are commonly used in our daily lives such as rent, salaries, etc. Explicit means there is an actual payment that takes place, these are the costs that accountants use in their books. Economists add implicit costs to this list, the opportunity costs. These are costs that are not as evident, for example if a student gives up a salary of $10,000 per year to start a business the student has to consider the salary as an implicit cost. Every cost is an opportunity cost, the money/time/resources could have been used elsewhere. For a student the opportunity cost of going to the movies may include the time spent going to the movies, watching the movie, time to return home plus all the explicit costs involved. The firm may look at resources used to produce a truck as opposed to producing a car, produce a laptop as opposed to a desktop computer; in any case resources are limited and economists thrive to account for all possible costs. At the national level opportunity costs maybe very large - the cost of a war takes away resources from building freeways, the cost of new regulations may drive corporations out of the country, and so on. Both at the microeconomic level or at the macroeconomic level there is always an opportunity cost. On the chart below we will calculate the opportunity cost of going to Palomar College for Jane Studious. Jane is currently working full time (40 hrs/week) and makes $12/hr. The cost per unit at Palomar is $26 per unit. What is the total cost of going to college if Jane quits her job and becomes a full-time student? Opportunity Costs of going to College Let's look at the data provided: Total costs Jane makes 40 x 12 = $480 per week Gives up $480 x 16 weeks = $7,680 (Opportunity cost) She will attend Palomar 16 weeks & take 4 classes 12 units x $26 = $312 Books, fees and parking $500 approximately $500 Other School Expenses (food, supplies, etc.) $600 Total Cost $9,092 As you can see from above the total cost - opportunity cost is $1,412. Of course, the returns are great as well