Opportunity Costs and Sunk Costs

A podcast that discusses opportunity costs and sunk costs.

Podcast by Taylor Moore and Caroline Flynn

Transcript

[MUSIC]

Kate: Hey everyone. Welcome to Oz-onomics, a podcast created for and by students in introductory economics classes at SUNY Oswego.

GABRIELLA: In this series, we'll have discussions about various economic principles and how they apply to our day to day lives.

KATE: Are you ready?

GABRIELLA: Let's go.

[MUSIC]

Taylor’s Part of Podcast Hi everyone! This podcast features Caroline and Taylor (myself) as we will be discussing certain economic topics and looking at how they can apply to real life examples. I will take the first part and Caroline will talk about the second half of our topics. Today we are going to discuss opportunities costs and sunk costs! These are very important things to talk about and acknowledge in the world of economics. Now let's get into what these terms mean, The opportunity cost is the cost of next best alternative use. It is calculated in terms of the other goods. On the other hand, the sunk cost is the money spent on goods or services which cannot be recovered such as paying for rent. While these ideas sound like they may have some similarities, they are actually totally different concepts. First let’s take a look at opportunity cost and dive in a bit further to see how it works. In an example, A person can produce either 50 units of wheat or 100 units of rice by using its all resources in the given season. What is the opportunity cost of 1 unit of wheat? When we are considering this question, we want to determine what we gave up or lost with the production of another good. So in this case, what did we lose in terms of rice by producing 1 unit of wheat? Are we giving up wheat or rice when we use our resources to produce one unit of wheat? The answer is the alternative, which is rice. Therefore, in this case when we produce 1 unit of wheat, our opportunity cost is 2 units of rice. Now that we have a pretty good understanding of opportunity cost, let's look at an example of a sunk cost. Think about whether this statement is true or false: Advertisements are a sunk cost. Before we answer, remember that sunk costs are money that is spent on goods or services that cannot be recovered. This example is sort of tricky because when we think of it in terms of advertising it seems like it is not a sunk cost because of the potential revenue that ads could generate. However, advertisement expenses are considered sunk costs. It is money that once a company or individual spends, they are unable to recover. Before Caroline takes over, I am going to talk about short run average cost and the way that it appears on a graph. When we consider short run costs, we are talking about things that happen in the short term such as parts of the production process and what will occur over a short term output. I have another true or false statement that I want you to consider: The short run average cost is U shaped. (keep in mind this is talking in terms of how it appears on a graph.) The answer to this question is true. The short run average cost is U shaped on a graph because of the law of variable proportion. This law states that while the quantity of one variable factor is changed, the quantities of the other factors remain fixed. This is how we end up with a U like shape on the graph. Podcast Outline 5 Caroline’s Part of Podcast Thanks, Taylor and welcome, again everyone. As Taylor mentioned, we are discussing opportunity cost versus sunk cost today. Sunk cost is the cost that we have already incurred. This cost cannot be recouped as it is already attempted to expend. Whereas opportunity cost is something that a person should take into account. As it is the value of a fog on activity or an alternative when another activity or opportunity is taken. Opportunity cost should have to be measured while making decisions. Let’s look at a couple more scenarios: If we state that the gap between average cost curve and average variable cost curve increases as production increases, but why? We can argue that it is true because the law of variable proportion applies or we could say it is false because the average fixed cost decreases as the production increases. We could even go so far as to say that both are correct or neither are correct. Any thoughts? Well, in this example, the argument that the gap between average cost curve and average variable cost curve increases as production increases is incorrect because the average fixed cost decreases as the production increases. In this next example we state that the average variable cost is minimum when marginal cost is equal to it. Is this the case? Why? We can either say that yes, it is because the marginal cost curve cuts the average cost at its minimum point or yes, it is because the marginal cost is ratio of change in total variable cost and change in output. In this scenario, BOTH are correct. The average variable cost is minimum when marginal cost is equal to it because the marginal cost curve cuts the average cost at its minimum point and also because the marginal cost is ratio of change in total variable cost and change in output. So, to reiterate what we’ve touched on today, the opportunity cost is the cost of next best alternative use which is calculated in terms of other goods; while sunk cost is the money spent on goods which cannot be recovered, such as rent. Thank you for listening today. We hope you learned a little more about these topics today and their importance to economics. So long and stay safe.

[MUSIC]

MICHAEL: There you have a folks on another edition of Oz-onomics, where economics becomes easier for Oswego students to understand where you get your money that you pay for your tuition worth. If you feel like being ahead of the curve, grab a seat, grab your phone, shift your fingers left and right. And download Oz-onomics on the podcast app. See you later.

The introduction to this podcast was provided by Kate Soanes and Gabriella Schaff. Michael Kolawale provided the outro. Music by Lobo Loco.