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The Concept of Opportunity Costs in Economics Term Paper


Introduction

Economics is normally divided into two large fields: microeconomics and macroeconomics. The main objects of microeconomics are customers and firms. It primarily studies the impact that choices have on individuals who make these choices (Rittenberg & Tregarthen, 2009). One of the main concepts of microeconomics is opportunity costs. This concept describes benefits that individuals could have had if they chose another course of action (“Opportunity costs,” n.d.).

The article Opportunity Cost Neglect Attenuates the Effect of Choices on Preferences describes the research that demonstrates the influence of choices on customer’s desires. The main goal of this paper is to review the article and discuss its connection with the concepts of microeconomics.

The Effect of Choices on Preferences

Psychologists have been focused on the notion that choices can change preferences for a quite long time. However, previous works studied “choices for which all alternatives were salient at the time of choice” (Greenberg & Spiller, 2016, p. 103). Although opportunity costs reveal the importance of the most prominent alternatives, many people ignore this concept. The article raises the question what impact opportunity costs have on the assessment of choice opportunities at the time of choice. It describes three experiments aimed to collect necessary data to provide the rationale for a conclusion.

People have numerous alternatives in everyday life. The process of making a choice has a significant impact on their desires. The experiments demonstrate that using “whether-or-not choice frames attenuated the effect of choices on preferences for implied alternatives” (Greenberg & Spiller, 2016, p. 103). The conclusions are based on the analysis of collected data.

Preferences and choices have strong interdependent relationships. Preferences form choices, and vice versa (Harberger, n.d.). Postchoice preferences enhance the satisfaction of chosen options. A wide range of alternatives helps to identify preferences. Therefore, a decision-making process becomes easier. However, the act of choosing an option changes preferences more dramatically than the act of rejecting.

Opportunities costs mean that every choice brings forgone options. The opportunity cost of a chosen option equal the value of a missed opportunity (“How individuals,” n.d.). In most cases, opportunity costs have to be taken into account when it comes to making a decision. However, there is a trend among the general public to neglect it. Neglecting opportunity costs leads to ignoring the large spectrum of available choices.

If opportunity costs are clearly demonstrated, “whether-or-not decisions transform into which-one decisions” (Greenberg & Spiller, 2016, p. 104). When customers take opportunity costs into consideration, their preferences become clearer. However, this effect disappears if opportunity costs are ignored.

The first experiment was made up of three phases: prechoice assessment, an act of choice, and postchoice assessment. Candidates had to make a choice, facing opportunity costs. The results demonstrated the calculation of precoice and postchoice spreads between assessments of the main alternatives and the opportunity cost. The postchoice spread became higher, along with the number of the main alternatives if opportunity costs were clearly presented. However, the correlation between the postchoice spread and the main alternatives was not found in case when opportunity costs were not clearly shown. This contrast occurred due to the assessment of the opportunity cost neglecting the main alternatives.

In the second experiment, researchers examined consideration at choice separately from consideration at evaluation. Ignoring opportunity costs reduced the influence on choices on preferences. The results revealed that if opportunity costs were clearly demonstrated, the postchoice spread became higher, along with the number of the main alternatives. This effect was significantly reduced when opportunity costs were not explicit at the time of choice. There was not any correlation between these factors during postchoice assessments.

In the first two experiments, choices significantly influenced preferences in case if opportunity costs were clearly presented. In the third experiment, researchers examined the correlation between preferences and the time of presenting choices. When choices displayed preferences, the correlation would not depend on the time of presenting choices. However, when choices had an impact on preferences, the correlation would be detected if choices were presented before assessments.

The results revealed that clearly presented opportunity costs had no impact on the correlation between choices and assessments. “The effect of the salience of opportunity costs was driven by evaluations of the opportunity costs rather than evaluations of the focal options” (Greenberg & Spiller, 2016, p. 107). Presenting choices at the time of assessment affect the connection between the evaluation of opportunity costs and the range of choice.

These three experiments illustrated that explicit opportunity costs made a greater impact on choices of preferences. Highlighting choice rather than assessments allows making that conclusion. Prior studies revealed that clearly presented opportunity costs alter the people’s choices. However, this work suggests that it changes the preferences of people for such options due to the modified assessments of opportunity costs.

Conclusion

This article has a direct connection with the main concepts of microeconomics. Opportunity costs and choice are two interdependent principles this science describes. Microeconomics reveals complicated relationships between these aspects and their influence on individuals and companies (Mankiw, n.d.). The article illustrates different conditions when choice affects the customer’s preferences and the role of opportunity costs in this process. However, further research in this area is highly important as it could provide additional data to support conclusions of this study.

References

Greenberg, A. E., & Spiller, S. A. (2016). Opportunity cost neglect attenuates the effect of choices on preferences. Psychological Science, 27(1), 103-113.

Harberger, A. C. (n.d.) . Web.

. (n.d.) Web.

Mankiw, G. (n.d.) . Web.

. (n.d.). Web.

Rittenberg, L., & Tregarthen, T. (2009). Principles of microeconomics. Irvington, NY: Flat World Knowledge, Inc.

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IvyPanda. (2020, October 5). The Concept of Opportunity Costs in Economics. Retrieved from https://ivypanda.com/essays/the-concept-of-opportunity-costs-in-economics/

Work Cited

"The Concept of Opportunity Costs in Economics." IvyPanda, 5 Oct. 2020, ivypanda.com/essays/the-concept-of-opportunity-costs-in-economics/.

1. IvyPanda. "The Concept of Opportunity Costs in Economics." October 5, 2020. https://ivypanda.com/essays/the-concept-of-opportunity-costs-in-economics/.


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IvyPanda. "The Concept of Opportunity Costs in Economics." October 5, 2020. https://ivypanda.com/essays/the-concept-of-opportunity-costs-in-economics/.

References

IvyPanda. 2020. "The Concept of Opportunity Costs in Economics." October 5, 2020. https://ivypanda.com/essays/the-concept-of-opportunity-costs-in-economics/.

References

IvyPanda. (2020) 'The Concept of Opportunity Costs in Economics'. 5 October.

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