Opportunity Cost of Going to College, Marginal Analysis - Essay Example

?Answers Opportunity Cost Opportunity cost of going to college Opportunity cost in economic terms is the cost of forgoing or sacrificing the consumption of one commodity or service in order to consume and derive utility from any other service or commodity. For computing opportunity cost of any commodity one has to take into account the next best substitute that has to be forgone or sacrificed. Under economies we generally compute opportunity cost in monetary terms. Considering the opportunity cost of going to college the next best alternative that can be sacrificed is the salary that an individual can get if he instead chooses a full time job. Such compromises are made each year. If the overall degree course the individual loses an annual salary of $80,000 in the three or four years (Gwartney, Stroup, Sobel and McPherson, 2009, p.29). The commodities and services of opportunity cost for attending college are listed below: Monetary cost of college: Attending college require a minimum amount that has to be spent on food, clothing. Transportation costs: The student has to spend some amount of money each for attending. For the travelling expenses opportunity costs does not remain same and fluctuates frequently. This is because the student might choose not to attend college someday or he may choose to attend extra days than he usually does due to some extra class or some particular college meeting (Gwartney, Stroup, Sobel and McPherson, 2009, p.30). Income through sports: If the student is an athlete he may earn huge through various tournaments. But such a job mostly requires the sportsman to travel a lot. In that case he may have to give up college. Clearly he has to choose between attending college and becoming a professional sportsperson (Gwartney, Stroup, Sobel and McPherson, 2009, p.29). Students dependent on parents: All the students attending college do not have to earn for their expenses. Sometimes students are dependent on their parents who take the responsibility of paying for all of their son’s or daughter’s expenses. In that case opportunity cost may be counted as zero (Gwartney, Stroup, Sobel and McPherson, 2009, p.29). Income in entertainment industries: Students who work as entertainers or pursue any other work in the entertainment industry have to spend a lot of time in the shoots or they may also have to travel abroad quite often. In that case too they have to choose between college and their work (Gwartney, Stroup, Sobel and McPherson, 2009, p.29). Missing T.V. shows: Attending college and pursuing a degree course also requires a student to study harder and appear for examinations. Thus in this respect the student would have less time for television and his favorite shows. In some cases while studying for college exams he might also have to miss out a big soccer match. Less leisure time: Attending college and then going for part time jobs- in this day to day busy schedule the student may not have any time left for leisure or spare time. Hence for attending college the student has to sacrifice leisure or any other activity that he used to perform during spare time. Higher Education: Attending colleges the student gets a professional degree. This may help the individual to earn higher income once he finishes college education than what he can earn currently by leaving college. 2. Marginal Analysis Decision taken on a margin Marginal analysis is a very important concept under microeconomics leading to efficient allocation of resources (McGuigan, Moyer and Harris, 2011, p.41). ‘Decision taken on a margin’ refers mainly to economic decisions. Alterations on the available amount of resources lead to such marginal decisions. It may be similar to decision making as simple as spending hours or money. Such decisions are assume to yield better output for a number of reasons. Firstly the decisions are made with full information on resources and shortages. Preferences and indifferences of an individual are also taken into account while making decisions. The involvement of analysis helps problem solving much simpler by making it less difficult. The outcomes obtained can be thought of as accurate and reliable (Moffat, n.d). Economic decision taken on a margin Setting the profit level of an organization by selecting output production level to the point where marginal output equals marginal cost can be regarded as an economic decision taken on a margin. Long term economic decisions regarding investments can also be cited as examples of economic decisions taken on a margin. The return that is expected from an investment venture is computed as the marginal return. The cost of financing the investment project is looked upon as the marginal cost incurred. The project will be undertaken if and only if the expected amount of marginal return from the project is greater than the marginal cost incurred on the investment project. If marginal costs exceed the expected marginal return the project will never be undertaken (McGuigan, Moyer and Harris, 2011, p.41). The investors will then never choose to invest on the project. This is an example of an economic decision taken on a margin. Economic decision taken on the basis of average costs or total costs Investment projects are economic decisions taken on a margin but are never true for a company that is incurring losses and considering the option of shut down. Such decisions will not be influenced by marginal costs. Exit from a market is decided taking into account a much broader picture (Piana, 2003). The firm stays in the market even if it is making zero profits in the long run. Here profit is computed as: Profit= Total Revenue – Total Cost The firm will only think of leaving the market if it is earning a negative profit, i.e. Total costs exceed total revenue. It will continue production in the short run also if total revenue = total cost. 3. Positive and Normative Two microeconomic statements The two microeconomic statements that can be found in today’s edition of WallStreet Journal are the following: “Network18 Shares Jump on Ambani Interest” “Apple Ruling hits Android” The first statement is concerned with a single person. It says that India’s richest man has acquired an Internet and television company which is the Network18. It is micro in the sense that although a well known personality world wide Mukesh Ambani represents a single individual and only his latest business activity has been stated here (Bahree, 2011). Similarly the second statement gives information about the latest business move of a single company called Apple which had achieved a legal victory today by handing out patents to smart phone users for using Apple internet. Although its activities will have worldwide impact the statement gathers news about a single US company Apple and its economic activities (Vascellaro, 2011). Two macroeconomic statements The two macroeconomic statements that can be found in today’s edition of WallStreet Journal are the following: “Inside Capitol, Investor Access Yields Rich Tips” “Conoco Gets a Permit to Develop Alaska Site” The first statement is concerned with important information on letting a deal on Hedge funds by democrats. Such a decision would lead to capital gains for the investors. It considers worldwide investment and world economy as a whole rather than concerning a single individual or firm. Hence it is macroeconomic (Mullins and Pulliam, 2011). The second statement is concerned with the engineers in the Army corps under the nation of United States and they have been granted permission to develop a particular site. This is stating the news for all the army engineers in the nation and hence is macroeconomic (Gilbert, 2011). Classification of sentences “Network18 Shares Jump on Ambani Interest” This is a positive statement because the information in the above statement can be verified by looking upon empirical evidence. It signifies information. “Apple Ruling hits Android” This is also a positive statement as it denotes some kind of business information and can be verified with the help of empirical evidence. “Inside Capitol, Investor Access Yields Rich Tips” This is a normative statement because it is simply an opinion on how the available information will help investors. “Conoco Gets a Permit to Develop Alaska Site” This is also a positive statement as it denotes some kind of information about the nation’s engineers and can be verified with the help of empirical evidence. 4. “For a company to invest $1 billion in research on an anticancer drug” Incentives Orphan drugs: A particular kind of drug which is known as the orphan drug is very profitable in recent times. 18 out of those 43 brands which have earned sales revenue of $1 billion dollar are orphan drugs. Orphan Drug Act: This act has led to considerable protection of drugs market and has played a key role in their growth. Many small sized as well as medium scale companies have grown under this Act. This may act as incentives for a company desiring to invest in research of anticancer drug. Health Insurance Plans: In recent times most families are opting for health insurances and the industry is currently experiencing a boom. Hence if the firm can only set a suitable that can cover up its costs of production it can earn positive profits. Less Competition: In a drug market that has government accountability many drugs are not discounted and many are not covered in the health insurance plans. Thus competition is quite less in drugs market and this may lead the company to invest in research for a new drug. Small population: the number of physicians and patients using anti cancer drugs are relatively small in number. Hence a smaller quantity of production will be able to suffice the populations. This may not require heavy investments (Coverage and Reimbursement: Incentives and Disincentives for Product Development, 2010). Disincentives Market size: Small markets that prevail for drug industry is a matter of concern for the companies desiring to invest in R&D for new drugs. High costs: High costs are always involved when a company is trying to invent a new drug and such high costs within a small market acts as disincentive for investment. Patents: In the current market structure high patent costs are required to be paid for marketing a drug and thus a company may be reluctant to invest (Coverage and Reimbursement: Incentives and Disincentives for Product Development, 2010). 5. Production possibilities A. The possibilities of the level of production can be accessed from the different combinations of output. Such an instance is shown in the C Graph below: 300 250 b 200 c 150 d 100 e 0 B 25 50 75 100 150 The graph is derived from the following data table below: Corn (MT) (C) Beans (MT) (B) C= 300-2B 300 0 a 250 25 b 200 50 c 150 75 d 100 100 e 50 125 f 0 150 g Under the graph if the farmer uses his land efficiently he can grow the c, d and e combinations of output if he uses his land efficiently. This is known in economics as efficient allocation of resources. B. The opportunity cost and marginal cost are calculated in the table below: Corn (MT) (C) Beans (MT) (B) Opportunity cost of producing C Opportunity cost of B Marginal cost 300 0 25 250 25 25 50 0/25 200 50 25 50 0/25 150 75 25 50 0/25 100 100 25 50 0/25 50 125 25 50 0/25 0 150 50 Thus the farmer’s opportunity cost of producing corn is 25 at each level of production. His marginal cost turns out to be zero. C. The slope of the PPF that we have graphed at each point is called marginal rate of transformation. It is the rate at which a good may be sacrificed to produce marginal unit of another good. Specifically it the opportunity cost of producing an extra or marginal unit of a good. This gives the marginal opportunity cost. In this way slope of PPF is related to marginal cost of producing goods. 6. Optimal Consumption Level Optimal consumption level denotes that amount of consumption that is required by consumer to satisfy level of utility from consumption. Here we already know the output level and the opportunity costs. In order to compute the optimal consumption level we need to know the specific utility function. Since a consumer cannot go beyond his budget, we need to know the budget equation. The money income of the consumer will also be required. We also need to know the prices of corns and beans. If M denotes the money income, PC, the price of corn and Pb the price of beans then the budget equation is given as, M = PCC + PBB If U be the level of utility then utility function is given as: U= U (B, C) 7. Production Possibilities . A. As seen from the graph the opportunity cost of producing 1 loaf of bread for Barney is cost of sacrificing production of 2 Pies B. As seen from the graph the opportunity cost of producing 1 Pie for Betty is the cost of sacrificing production of 1.3 loaf of bread C. Here it can be said that Barney has absolute advantage in pie production because he has to forgo only half loaf of bread for producing pie compared to1.3 of Betty. Betty has absolute advantage in bread production because for producing 1 loaf of bread he has to sacrifice only 0.75 part of pie as compared to Betty. D. TC/ No 0f units =Cost per unit Cost of per unit of production of pie, For Barney= 14P/7B= 2P For Betty = 15P/ 20B= 0.75 P Thus Betty has a much economical cost compared to Barney and hence has comparative advantage in bread production. Similarly for production cost per unit of loaf, For Barney=7B/14P= 0.5 B For Betty=20B/15P= 1.3B Thus Barney has comparative advantage in bread production 8. Yes it is possible that a person can have no absolute advantage rather absolute disadvantage in both the skills of lawning and mowing. Similarly a single person can have absolute advantage in both the skills. But it is never to have comparative disadvantage (comparative disadvantage) for a single person in both the skills. The case may be explained as follows: it is possible that a person has superiority in both the skills compared to another person. In that case he can have absolute advantage in both lawning and mowing while the other totally has absolute disadvantage. But for the other person needs to have little advantage comparatively in one skill than the other have in another skill. That is the other person can be little better in mowing comparative to the superiority or advantage in lawning. Else the other person cannot work at all. Similar logic is applied for trade between a developed country having absolute advantage in both commodities but the developing country has comparative advantage in at least one of the commodities. Else trade cannot take place. References: 1. Bahree, M. (December 20, 2011), Network18 Shares Jump on Ambani Interest, WallStreet journal, available at: http://online.wsj.com/article/SB10001424052970204879004577109513639432808.html?mod=WSJINDIA_hpp_MIDDLETopStories 2. Coverage and Reimbursement: Incentives and Disincentives for Product Development, (2010), National Academy of Sciences, available at: http://www.ncbi.nlm.nih.gov/books/NBK56182/ (Accessed on December 20, 2011) 3. Gilbert, D. (December 20, 2011). Conoco Gets a Permit to Develop Alaska Site, WallStreet journal, available at: http://online.wsj.com/article/SB10001424052970204791104577109000913271854.html?mod=WSJ_business_whatsNews 4. Gwartney, JD, Stroup, RL, Sobel, RS and McPherson, D. (2009), Economics: Private and Public Choice, Mason: Cengage Learning 5. McGuigan, JR, Moyer, CR, and Harris, FH. (2011). Managerial Economics, Mason: Cengage Learning 6. Moffat, M. (n.d). Marginal Analysis: Thinking at the Margin, About Economics, http://economics.about.com/od/informationforbeginners/a/marginal_analysis.htm (Accessed on December 20, 2011) 7. Mullins, B and Pulliam, S. (December 20, 2011). Inside Capitol, Investor Access Yields Rich Tips, WallStreet journal, available at: http://online.wsj.com/article/SB10001424052970204844504577100260349084878.html?mod=WSJ_business_whatsNews 8. Piana, V. (2003). Costs: A key concept in Economics, Economics Web Institute, http://www.economicswebinstitute.org/glossary/costs.htm (Accessed on December 20, 2011) 9. Vascellaro, JE. (December 20, 2011), Apple Ruling Hits Android, WallStreet journal, available at: http://online.wsj.com/article/SB10001424052970204791104577109010174484888.html?mod=WSJINDIA_hpp_LEFTTopWhatNews Read More