Opportunity Cost versus Sunk Cost - YouTube

From the international headquarters of the

McNeil Film Studios in beautiful

Baja Tustin, I'm going to talk about

opportunity cost very quickly, I mean cost. When economists talk about cost

they're talking about opportunity costs unless they say differently.

An opportunity cost means the value of the next best

foregone opportunity because you do something.

Basically it's the value of what you give up

because you do something.

So cost is different to everyone because everybody has different costs and everyone has

different costs every day.

The first day of winter after a snowfall, in the mountains locally

here,

the cost of coming to class increases for a lot of people who love to

snowboard and ski

because if they come to class they have to give up

snowboarding and they value it very highly. So it's a high-cost day.

If I a steal thousand dollars from

everyone of you, the cost to you is gonna be different because for some if you

the value of what you lose out that thousand dollars

might be very serious. You will have to do without lunch for a semester,

whereas for others, the thousand dollars will have almost no effect in their life. So

there are high cost students -

people have to give up something very valuable in order to come and do school

and there are low cost students. Somebody told me once, a

judge told me I was in trouble. I was going to jail.

I had to make something of my life I had six months to do it. I had to go to

college

and do well. Now, is that a high cost or a low-cost student?

Well, it's low cost because what does this student give up in order to go to college?

Jail! Is that a high or low valued alternative?

Low valued. Anyway, costs always come

as a result actions by people

and it's the value of whatever

people give up in order to do something. So,

thats opportunity cost.

So, examples.... It's not money exactly, it's not time exactly.

If you spend two hours studying your econ, if everybody does they don't all

pay the same costs or incurr the same cost.

For some the value of what they give up his very valuable that day and for

others

not. In which case ones who give up something valuable they are high cost

studiers of economics and the others, low cost. Now we have to distinguish opportunity

costs

which are marginal or real costs - the cost of an action

from sunk costs. These are the costs already paid,

already incurred. You've already condemned yourself or committed

yourself to paying for them

and they will not be affected by the current action. So for instance,

if you park at school today after having bought a parking pass; their aren two options

for parking.

One is buying the parking pass for the semester, the other is paying $2

a day for

the right to park that day. If you come

to school and you pay the $2, that's a marginal cost of

parking at school that day. But what if you bought the parking sticker which is

non-refundable.

It gave you the right to park any day at school

for whatever it is, $30 - or not. It doesn't matter -

but all costs are paid when you pay the $30. So

every day that you park after that, the opportunity cost

is zero. You gotta remember opportunity cost is not same as average

cost or

LIFO'd or FIFO'd cost or total cost It's what did you give up with regard to money as

a result of parking today

at school if you bought the sticker, and the answer is

$Ø. The same thing if you go to Disneyland and you go on 10 rides - you pay $60 to get in

you go on 10 rides. The seventh ride was Thunder Mountain Railway.

What did it cost you to go on the ride (money cost) and the answer is $Ø

because the $60 gave you the right go on every year

or no ride and all costs of the ride were paid -

money costs. But there are time costs, you know, of going on the

ride depending on how long the line is. So let's

see if we can tell and give an example

of the difference between opportunity costs which are marginal costs

and sunk costs which are fixed costs.

I made a deal with one of my siblings

a while back and I said I'm going to Europe and if you will go with me,

you just pay the marginal cost of going to Europe

with me - that means the opportunity cost.

What additional opportunities will I incur because you come with me.

So which costs should I included in calculating

the cost of taking this sibling with me.

Should I include the airline fare? Well,

yes, that's marginal, I'm afraid, because

if he doesn't go there would be no

money paid for the airline ticket.

What about the car? I was going to rent a car anyhow.

So if I rent a car and take him is that a sunk cost or a marginal cost to me?

The answer is sunk. Should I include it? Should I collect money from him? No.

And gas for the car? I'm gonna burn the gas anyhow,

he's not going to add more to the gas, particularly. So that's sunk. I

should not include that.

What about the insurance for the car? Same again - sunk.

What about food? Well, to the extent that he eats food,

he should buy it, so that's a marginal cost of him going.

There will be no marginal (additional) cost to me.

The hotel. Now that's a tricky one because single rooms are like, we'll say

a single is like $40 a night and a double room is like $60 a night.

So how much of that is sunk? Well, the $40 is

sunk and the $20 is marginal. I should collect that from him.

So, anyhow, this is an attempt to distinguish between sunk costs

and marginal costs and explain the definitions of both and to

be able to distinguish between them.

[Waves goodbye as the credits roll.]