Wednesday, August 16, 2006

Opportunity Cost

In economics, there is this notion of opportunity cost, which, as Wikipedia defines it, "the cost of something in terms of an opportunity forgone" (http://en.wikipedia.org/wiki/Opportunity_cost). What this means is that, given two choices (A and B), the cost of choosing A is that of choice B. In other words, you have two choices, studying or watching television. The cost of studying is not watching televesion. Consequently, it is opportunity cost that states the nothing is actually free, because the cost of the free item is not doing something else. In this essay, I am going to contend this notion that this is not always the case.

To illustrate, Johny has been given two choices (A and B). Both choices are free in terms of there is no dollar value for either choice. In other words, Johny does not have to forgo any money to obtain either choice. However, choice A represents anything that can be considered non-fatal. On the other hand choice B represents a choice that will be fatal (such as taking cyanide). A rational human being would no doubt chose A. Johny, being a rational human being choses A. Now, in terms of the conventional view of opportunity cost, the cost of Johny's decision is that of choice B. This is where my issue arises.
How can choice A have a cost to it in the situation presented? The very definition of rationality, which is basically sanity, would steer a person away from choice B. Consequently, choice B cannot be construed as being a cost upon choice A. Ergo, choice A does not have a cost upon it.

What does this all mean? This means that in a world as simple as the one presented, that there may be actually things considered free in all aspects, whether economic or accounting. However, in a real world situation, there would be other choices presented to Johny (or any one else) so that there would actually be an opportunity cost enacted upon choice A.

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1/05/2007 9:24 AM  

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