Section 2 Topic 4: Opportunity Cost
professor penny
There is no such thing as a free lunch. That lunch could have gone to someone else or been served as dinner. Since there’s always another use, every lunch (and decision) has a cost.
Learning goals
By the end of this topic, you should be able to:
- Define and calculate opportunity cost
SECTION OUTLINE
Topic 4 Opportunity Cost
Content Videos
The Gus A. Stavros Center for the Advancement of Free Enterprise and Economic Education at Florida State University is pleased to offer these resources. They were created by Teaching Professor Joe Calhoun.
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key point
Nothing is free. It may have a zero price but it always has a cost.
Certified peer mentors
Mentors give presentations to groups about our topics. They also assist other students in personal finance matters and answer questions during individual meetings. To schedule a presentation or an appointment to discuss your situation email coss-financialpeermentor@fsu.edu or visit the Stavros Center financial wellness page.
a topical story
Isabella stared at her practice quiz, having no clue of the first question’s answer. History was not her favorite subject. She found studying different people and events from hundreds of years ago to be a bore. A knock on her door gave her a good excuse to step away from it. She opened the door, beaming at Madison standing on the other side. “I thought you’d never come!” Isabella said.
Madison chuckled, “Sorry, I had to stop and get some brain food.” Madison had brought with her two muffins and some water bottles. She handed a muffin over to her friend, setting the water bottles down on the desk in Isabella’s room.
Isabella smiled, taking a bite out of the cinnamon muffin. Isabella often called on Madison for help with her history course. Her dorm room being just down the hall from hers, it had become a convenient practice.
“So, what are you working on?” Madison asked, eyeing over the paper on Isabella’s desk.
“The most boring thing ever! I just don’t see why I have to learn all of this history stuff if I’m studying Business Management. It’s a waste of time!” Isabella lamented, having flopped onto her bed in defeat. “You know, I’m beginning to wonder if going to college was even worth it.”
“It’s definitely worth it!” Madison said. You’re better off going to college than staying home and working full time. Well, according to the opportunity cost.”
“The opportunity cost?” Isabella questioned.
“It's like the value of what you would’ve done if you didn’t go to college. In the long run, the value of going to college and paying tuition is better than the value of working, say...as a receptionist for your family’s business,” Madison explained. “Sure, you’ll have a job straight out of high school, but imagine how difficult it would be to move further without that Business Management degree. You’ll have to work for your parents forever to catch up!” Madison explained.
Isabella gave a slight shudder. “I love them…but that sounds horrible.”
“Exactly, so the opportunity cost in this case is the amount of money you’ll make with only a receptionist’s income as compared to what you would make with a higher-paying job even after four years of paying for college. It's really the better option to just stay where you are and finish off strong,” Madison said.
Isabella let out a dramatic sigh, still laying on her bed. “And that includes finishing this stupid practice quiz?” Isabella asked reluctantly.
“Yes, that too,” Madison said, nodding her head. “All you need is a little nudge in the right direction!” Madison encouraged.
Isabella gave a teasing glare, “A little nudge in the right direction, huh.” Isabella stood up and looked at the first quiz question again. “Spot me a little nudge on this one then, yeah?”
Madison finally began to eat her own muffin, not even looking at the quiz. “Rutherford B. Hayes,” she said coolly.
Isabella checked the answer key, Madison having given the correct answer. “How’d you know?” Isabella asked.
“It’s the brain food, of course!” Madison joked, holding up her muffin.
Isabella chuckled and shook her head as she set back to work.
(Story created by Jasmine George, Ana Siqueira, Courtney Swanson and Alex Thompson)
related books
These books have a chapter directly related to this topic. Please read them for more details.
Chapter 2: Kiyosaki, Robert. Rich Dad Poor Dad: What the Rich Teach Their Kids About Money That the Poor and Middle Class Do Not! Plata Publishing, 2017.
Chapter 6: Ramsey, Dave. Dave Ramsey's Complete Guide To Money. Ramsey Press, 2012.
Chapter 4: Hogan, Chris. Retire Inspired: It's Not an Age, It's a Financial Number. Ramsey Press, 2016.
additional resources
https://smartasset.com/investing/opportunity-cost Links to an external site.
https://pigly.com/budget/opportunity-cost.php Links to an external site.
https://www.annuity.org/financial-literacy/ Links to an external site.
other books
Malkiel, Burton. A Random Walk Down Wall Street: The Time-Tested Strategy for Successful Investing. W. W. Norton & Company, 2020.
Wood, William. Getting a Grip on Your Money: A Plain & Simple Christian Guide to Managing Personal Finances, Eliminating Debt, Spending, Saving & Giving, Investing for the Future. Intervarsity Press, 2002.
Bach, David. Smart Women Finish Rich, Expanded and Updated. Currency, 2018.
Bogle, John. The Little Book of Common Sense Investing: The Only Way to Guarantee Your Fair Share of Stock Market Returns. Wiley, 2017.
Clason, George. The Richest man in Babylon. Dauphin Publications Inc., 2018.
Hill, Napoleon; Arthur R. Pell. Think and Grow Rich: The Landmark Bestseller Now Revised and Updated for the 21st Century. TarcherPerigee, 2005.
Lynch, Peter; John Rothchild. Beating the street. Simon & Schuster, 1994.
Kobliner, Beth. Get a Financial Life: Personal Finance in Your Twenties and Thirties. Simon & Schuster, 2017.
Orman, Suze. The 9 Steps to Financial Freedom: Practical and Spiritual Steps So You Can Stop Worrying. Currency, 2006.
Bach, David; John David Mann. The Latte Factor: Why You Don't Have to Be Rich to Live Rich. Atria Books, 2019.
Hogan, Chris. Everyday Millionaires: How Ordinary People Built Extraordinary Wealth―and How You Can Too. Ramsey Press, 2019.
important government sites
Economy:
Federal Regulation:
Other:
Social Security Administration Links to an external site.
ECO 3041
ECO 3041 Personal Finance is a 3 credit hour course offered in-person and online each fall and spring semester. The purpose of the course is to provide you with the specific content knowledge of personal finance and to give you opportunities to start using that knowledge to create good habits, make better financial choices, and live a more fulfilling life. It covers material for all 33 topics listed here. See Professor Calhoun's most recent syllabus here. ECO_3041_SP21.pdf Download ECO_3041_SP21.pdf
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To schedule a presentation or an appointment with a certified peer mentor to discuss your situation email coss-financialpeermentor@fsu.edu or visit the Stavros Center financial wellness page.