Micro 1.5-Micro Activity-You Don't Have to Spend a Buck to Have a Cost

Last Friday night you decided to stay home and watch television instead of going to the movies with your friends. Did this decision involve any cost? Yes, because even though you didn’t spend a buck, there was an opportunity cost, which represents the best alternative that you did not choose, such as working or participating in another activity. Whenever consumers, producers and governments make choices, they base their decisions on the costs involved. In economics, costs include not only the out-of-pocket expenses you’d typically consider, called explicit costs, but also implicit costs, which measure the value of resources that could have been used elsewhere. For instance, if you decide to go to the movies, your explicit costs may include the ticket, popcorn and soda. Additionally, you would include the implicit costs, such as the pay you would have earned had you worked during the time required to go to the movies. Economists refer to these combined costs as opportunity costs. When you base decisions on explicit costs only, you can measure the number of dollars coming into your wallet versus the number flowing out. But rational people consider more than invoices and receipts when they compare marginal benefits with marginal costs. Extra benefits and extra costs include implicit costs, so making decisions by merely considering the flow of funds into and out of your wallet will lead to decisions that fail to maximize your satisfaction.