Influence of Opportunity Cost on Making Economical Decisions
Decision making in economics is under influence by many varying factors. There are however specific factors that continuously affect every decision making. These factors include; utility, opportunity costs, sunk costs, time value of money, scarcity of resources, etc. this paper will be mainly be determining the influence of opportunity cost on making economical decisions. The price elasticity of demand will be analyzed and how it influences price making decisions. The paper will be of great importance to the individual households, to investors (business management) and to the economies policy makers. This is because absolute and comparative advantage are important in a country’s production of goods and services.
Joe and I have identical expenditure patterns since we have similar tastes. We both are longing to watch an AFL game in Launceston. Since I had time to purchase a ticket from Ticketmaster, the cost I incurred is $ 30. But this assures me that I will secure a good seat at the game. Since Joe is not available, he plans to purchase the ticket at the game which costs $ 25 since the Ticketmaster’s surcharge is excluded. However, Joe is not assured that he would get a good seat. The opportunity cost of getting a good seat is the $ 5 paid as fee when one buys a ticket from the Ticketmaster (Lal and Srivastava, 2009). Initially, both of us are likely to go, but after the hailstorm makes it seem less attractive for driving to Launceston, the probability of one person going alone, and for the other not going increases. Who goes? To answer this question, we need to ask ourselves another question. What do I lose if I don’t attend the AFL game? Personally I had already incurred a non-refundable cost as I had purchased the ticket earlier from the Ticketmaster; Arnold (2010) referred to this as a sunk cost. On Joe’s case, he is yet to incur some cost as his plans were to get the tickets at the game. The comparison shows that I have something to lose and the probability of me going is high. Joe has nothing to lose and thus the probability for his going is low. According to Mankiw (2012) my opportunity cost is $ 30 that I could have used for other uses.
Table: hours taken to write assignments and completing a set of tutorial questions
|
Writing Assignments |
Tutorial questions |
|
|
Nancy |
4 |
2 |
|
Lucy |
6 |
2 |
The time taken on each tank completion indicates how efficient one is in doing it. The absolute advantage is determined by the direct observation of the efficiency level (Pettinger, 2012) whereas the comparative advantage is determined by comparing the opportunity cost for forgoing doing the other task (Indiatimes.com, 2017). Nancy has an absolute advantage in the assignments writing since the hours she takes to complete are lower than those taken by Lucy; Lucy doesn’t have an absolute advantage in writing assignments. The two ladies takes equivalent time to complete sets of tutorial questions; no one is more efficient in this task and thus none has an absolute advantage in it.
Absolute and Comparative Advantage in Country’s Production of Goods and Services
Nancy has a comparative advantage in assignments writing because the time she takes in writing the assignments could be otherwise used in completing 2 sets of tutorial questions since each set takes two hours (Amadeo, 2016). This is in comparison with Lucy whose 6 hours for writing an assignment could be used in completing 3 sets of tutorial questions. Thus, the opportunity cost of Nancy when she writes an assignment is lower than that of Lucy when she writes an assignment too (2 3). On the other hand, it can be deducted that Lucy has a comparative advantage in completing a set of tutorial questions since the hours she takes on a tutorial she could have written 1/3 of an assignment. This is in comparison with Nancy whose 2 hours of completing a set of tutorial questions could otherwise be used to write ½ of an assignment. Thus, the opportunity cost of Lucy when she completes a set of tutorial questions is lower than that of Lucy when she completes such a set too (1/3 1/2).
Generally, each should do what she has a comparative advantage at, and then swap with each other (Nash, 2017). But the case is different for Nancy and Lucy. Nancy should specialize in writing assignments while Lucy on completing the tutorial questions. Their swapping ratio is one assignment for 3 tutorial question sets (1:3). Their disagreement against the swapping is because; Nancy would have to wait for 6 hours in order to trade the assignment she writes for 4 hours. There is a 2 hours difference that will not be utilized effectively. Furthermore, there is no advantage for Lucy to complete 3 tutorial sets in 6 hours only to receive a single written assignment since its equivalent to writing the assignment by herself in the same 6 hours. Inefficiency is resulting in this case.
When the price is 3, the price elasticity of demand is calculated as follows;
Price elasticity of demand (PED) at a point =
Q = 6000 – 9000 = – 3000
P = 4 – 3 = 1
P = 3
Q = 9000
PED =
Part 3c
When the price of croissants is $ 3, 9000 units are demanded. But when the price is $ 4, only 6000 units are demanded. This is a fall in the quantity demanded. We multiply the price by the corresponding revenue to determine the amount of sales revenue made.
When price is $ 3, the sales revenue is;
Revenue (PQ) = 3 * 9000
= $ 27,000
When the price is $ 4, the sales revenue is;
Revenue (PQ) = 4 * 6000
= $ 24,000.
When the price is $ 3, the sales revenue made is equal to $ 27,000, but when the price is changed to $ 4, the revenue sale is $ 24,000. There is a $ 3000 fall in the revenue raised. This is because the PED for Croissants was unitary elastic. Since the demand is elastic to price, demand changes with a greater magnitude when price varies by a unit.
Price Elasticity of Demand
Part 3d
Price elasticity of demand (PED) at a point =
Q = 9000 – 12000 = – 3000
P = 3 – 2 = 1
P = 2
Q = 12000
PED =
PED = – 0.5
When the price of croissants is $ 2, 12,000 units are demanded. But when the price is $ 3, only 9,000 units are demanded. This is a fall in the quantity demanded. We multiply the price by the corresponding revenue to determine the amount of sales revenue made.
When price is $ 2, the sales revenue is;
Revenue (PQ) = 2 * 12,000
= $ 24,000
When the price is $ 3, the sales revenue is;
Revenue (PQ) = 3 * 9000
= $ 27,000.
When the price is $ 2, the sales revenue made is equal to $ 24,000, but when the price is changed to $ 3, the revenue sale is $ 27,000. There is a $ 3000 increase in the revenue raised. This is because the PED for Croissants inelastic. Since the demand is inelastic to price, demand changes with a small magnitude when price varies by a unit. At the price of $ 2, all bakeries should consider raising the price to $ 3 since revenues would be increased.
I expect to find prompt services that are more courteous in an expensive gourmet restaurant compared to that offered in inexpensive cafes. The comparison for expensiveness of a restaurant indicates that the people who visit these two different restaurants has different income levels. For the high-income group, they are more time conscious and are not willing to wait for long to be served, therefore they are also willing to pay handsomely for prompt services. The low-income group are less time conscious and are not willing to spend extra income but rather should wait till the service is offered. The higher price paid in expensive gourmet restaurants enables them to employ a greater laborers and also new technologies that making serving easier and faster. Zaffran (2017) noted that the stuffs are many such that there those for welcoming and for parting. He also noted that the stuffs are well educated on the best qualities of handling customers. The revenues raised in inexpensive restaurants are too low to allow the employing of enough laborers or even new technological innovations. Further, it can be argued that the high-income group who go to the expensive gourmet restaurants are lower than the many low-income group who flocks the inexpensive restaurants.
References
Amadeo, K. (2016). Comparative Advantage. [Online] thebalance.com. Available at: https://www.thebalance.com/comparative-advantage-3305915 [Accessed 13 Apr. 2017].
Arnold, R. (2010). Microeconomics. 9th ed. Mason, OH: South-Western Cengage Learning.
Indiatimes.com, (2017). Definition of ‘Comparative Advantage’. [Online] Indiatimes.com. Available at: https://economictimes.indiatimes.com/definition/comparative-advantage [Accessed 13 Apr. 2017].
Lal, J. and Srivastava, S. (2009). Cost accounting. 4th Ed. New Delhi: Tata McGraw-Hill.
Mankiw, G. (2012). Principles of microeconomics. 6th ed. Mason, OH: South-Western Cengage Learning.
Nash, J. (2017). Absolute Advantage in Trade: Definition and Examples. [Online] Study.com. Available at: https://study.com/academy/lesson/absolute-advantage-in-trade-definition-and-examples.html [Accessed 13 Apr. 2017].
Pettinger, T. (2012). Absolute Advantage. [Online] Economicshelp.org. Available at: https://www.economicshelp.org/blog/glossary/absolute-advantage/ [Accessed 13 Apr. 2017].
Zaffran. (2017). A different dining experience; expensive but definitely worth visiting. [Online] Tripadvisor.ie. Available at: https://www.tripadvisor.ie/ShowUserReviews-g294009-d8773163-r464534125-Zaffran_Dining_Experience-Doha.html [Accessed 14 Apr. 2017].
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