[MUSIC] So, this week, we are going over several principles that you're probably going to use in the rest of the semester. The first principle, the main principle that we have to talk about is the principle of opportunity cost. You probably have ever taken a class in Economics, you probably heard about opportunity cost. Even if you have never taken a class in Economics, you probably have heard about the concept opportunity costs but you deal with the concept opportunity costs every time, all the time in your life. Think about the opportunity costs of you watching this lecture. Although, we think, economy think about opportunity cost as the value of the next best alternative you have when you do something or when buy something, right? So, for instance, the opportunity cost of you spending your precious time watching me here talk to you, could be what you would be doing instead, if you were not watching me here talking to you. which, what would you be doing? Well it, it's different for each of you. Some of you, maybe, like to take a walk on the beach. Maybe you want to watch a movie. play play a game of basketball with your friends, study for your class, work, right? So, if you're using your time to do to watch me, you're probably not going to be able to do those other things. So, whatever thing you will be doing with your time if you're not watching this lecture, that will be the opportunity cost of you watching this lecture. Now, this concept is a central concept of economics and it looks like a really simple concept. But as a, a very famous economist said, the beauty of this concept of opportunity cost is that it's perfectly simple without being perfectly obvious. And let me give you an example of that. Here's a question that that we usually present to people to students on opportunity cost. And there's a little story about this question and I'm going to tell you in a second. But first, I want to see if you can actually, now that you know what an opportunity cost is, if you can actually answer the question correctly. So, suppose you actually have you won a free ticket to see Eric Clapton concert, and assume that it has no resale value. assume that Bob Dylan another musicians, famous musicians, is performing on the same night and it's the most attractive alternative. If you didn't go to see Clapton, you will see Dylan. If you don't see Dylan. you will see Clapton. now, tickets to see Dylan costs about $40, but you're willing to pay $50 to see him. And assume that for the fans that's sitting there, there's no other cost of seeing each performers. Now based on this information, what would be the opportunity cost of seeing Eric Clapton? And I'm going to give you 5 choices. Is the opportunity cost of seeing Eric Clapton, 0, is it 10, is it 40, is it 50, or is it none of the above? With the information we gave you, which one of these is the opportunity cost of seeing Eric Clapton? Take a second and try to answer on your own, and then we'll go over the answers here. Alright. So, let's summarize all this information we have here. So, the, what the information I given you, is the value to see Dylan, value you get is $50 and that the cost to see Dylan is $40. There's no other cost and if you don't see Clapton, you'll see Dylan and if you don;'t see Dylan, you'll see Clapton. So, there are only two alternatives you have tonight. If you're going to see Clapton, how much are you giving up? Well, to think about the opportunity cost. The definition is that the value you give up of your best alternative. So, let's say, you don't see Clapton, you don't see, go to see Clapton, and you go see Dylan. Well, how better off you are if you go see Dylan? Well, you're willing to pay $50 to see him. But you have to pay $40 to see him. So, after you see Dylan, in dollar terms, you're better off 10, alright? It's likely you want to buy a hamburger at the store and the burger costs $5 and you're willing to pay $10. After you buy the burger, you're better of by $5. I mean, you have the burger, but you don't have the $5 you paid to get the burger. So, you only have the $5 extra that you didn't have to pay to get the burger. That's, that's your surplus, that's your value, right? So, the same thing here. If you go to see Dillon, how better off you are? Well, you are willing to pay 50, you only pay 40, so you're better off $10. If that's the value you get if you go see Dylan, if you don't see Dylan, how much you loose, $10. Because if that's the value you get if you go see Dylan, and you don't see him, and you see Clapton, your giving up the $10. So, that is the opportunity cost of seeing Clapton. It is $10. It is $10. That's the answer. There's no there's no other answer. Now, to give you an idea of how difficult this concept of opportunity cost could be, well, I don't know how many of you actually thought why the answer was 10. But when I have given this question to my students and I've given this to thousands of students accross the US we have caculated the percentage of students who get it right the first time, we actually found out that about 7% of students who have taken a class in Economics are able to answer this question correctly. Which tells you a lot about how good economic classes are out in the US, but also tells you a lot about how difficult this concept is. Now, one interesting fact is that when we ask this question to thousands of students who have never taken an Economics class, they do better. About 18% of them get it right. We don't, we again, tells you a lot about the confusion about opportunity cost and perhaps even, even, even more confusing when you're exposed to the concept. so this is actually, this question of opportunity cost is a very interesting question because it's simple without being obvious. So we're going to, I'm going to give you a lot more questions on opportunity cost. But the idea of opportunity costs, remember, is simple, but is not obvious and hopefully that will be one thing you will notice as we progress through the course. Now, we're going to use this as a concept of opportunity cost probably in the next principle we talk about which is mid-marginal benefits. [MUSIC] Produced by OCE Atlas Digital Media at the University of Illinois Urbana-Champaign.
