For the term paper, you are required to write on Opportunity Cost based on an economic topic. You will research and find an article that covers Opportunity Cost. You can use an article online or offline from any reputable source. You will write up a review of the article and integrate ECON 101 concepts into your review. Please make sure you both summarize the article and discuss how it relates to ECON 101.
Solution
Opportunity Cost
Opportunity costs are the potential benefits which are foregone or the implicit costs of choosing an option. It can be explained through the example of buying of a movie ticket which cost $8.00 per ticket. This same cost can be used for many other purchases. Or else, it can also be used as saving for a later time (Bartels & Urminsky, 2015).
The neoclassical economics assumes that the consumers take opportunity costs into account while evaluating a transaction decision. It needs them to evaluate all available options. However, the experimental studies conducted in the past have shown that consumers often neglect opportunity costs associated with the non-presented alternatives. Unless explicitly pointed out, consumers tend to neglect the opportunity costs. The experiment of the purchase decision between a cheaper and expensive mug has explicitly indicated the opportunity cost of labeling it on the cheaper mug through the phrase “save $5 for spending it on something else” titled the decisions of the consumers more towards buying of the cheaper mug. While considering the opportunity costs, the studies have shown that the people tend to spend less as a result.
Introduction to the Article
People are often involved in neglecting of the associated opportunity costs of a transaction. They usually do not consider all of the alternatives available in the particular choice set. Scholars and researchers have tended to believe that the poor people should have more tendency to consider the opportunity costs as they have a limited budget, and thus they should be more concerned about their trade-offs. However, it is known that high-income as well as low-income, both tend to ignore the costs associated with the foregoing options (Carvalho & Stephan Meier, 2016). The article reviewed in this paper is published in the Journal of Behavioral Decision Making. The paper aims to find evidence if the poor people are more willingly involved in neglecting the opportunity costs. It experiments different products with both income levels with higher and lower prices, reminding the participants with different methods of the opportunity costs associated with their decisions.
The study conducted shows that the poor and rich both had reduced willingness for buying when reminded of the opportunity costs. It as per the article shows that both poor and rich are involved in neglecting of the opportunity costs equally (Plantinga, Krijnen, Zeelenberg, & Breugelmans, 2018).
Opportunity Cost Neglect in Poor
Poor and rich both make financial decisions differently. As per the article, it is shown that the poor are more concerned about their future and thus are more risk aversive. The studies have shown that poor are more able to assess the value of money and thus make better financial decisions. Studies show that the poor people have a very narrow margin of errors, this is the reason that the same behaviors took by rich people often have pronounced effect on the poorest people.
People who have a particular slack in their budgets, or are considering any low-priced products, usually, tend to ignore the opportunity costs associated with the purchase decision. However, the purchase decision whose trade-offs is significant usually for high=priced products, people tend to weigh the opportunity costs more often.
Experiment
The experiment conducted in the study tested people with low-incomes, and high-incomes. All the experiments involved the participants to be asked to make a purchase decision. Then, they are again asked to make a purchase decision after giving explicit information about the opportunity costs. The experiment is designed to replicate the findings of a past study in which it showed that the rich consumers tend to lower their willingness to buy after being given information about the opportunity costs. They tend to replicate the results for the high-income consumers and the opposite for the low-income consumers.
All the participants are familiarized with the scenario of encountering an attractive product and asked if they would like to buy the product. Some are then given the explicit information about the opportunity costs associated with it in a manipulative manner. Then they were asked if they considered the opportunity costs while considering the purchase decisions. The result was expected to be showing the lower effect of showing the opportunity cost of the willingness to buy and generating more alternatives from the saved money by the poor people as compared to the rich people.
Results
The results show that the participants from both high and low-income level showed a lower willingness to buying after being aware of the opportunity costs. Similarly, the poor and lower income level showed less neglect to the opportunity costs as compared to the rich but only significant statistically. The results of the conducted study show that the findings of the Frederick experiment were replicated by decreasing the willingness to buy by reminding people of the opportunity costs. However, this effect is found to be true for both high and low-income level consumers. Both were equally reluctant in buying after being shown the opportunity costs associated with it.
Conclusion
Thus, it can be concluded that the article shows that both, poor and rich are involved in neglecting of the opportunity costs while considering purchasing decisions. This study enforces the notion that people tend to neglect the cost of foregone potential benefits associated with a purchase decision. However, it denies the view of scholars that opportunity cost should be considered more by the poor. The findings show a potential exception for the findings as well, showing that the poor consumers who participated in the study were effectively not poor enough, but then rules it out as a viable explanation.
Reference
Bartels, D. M., & Urminsky, O. (2015). To Know and to Care: How Awareness and Valuation of the Future Jointly Shape Consumer Spending. Journal of Consumer Research , 41, 1469-1485.
Carvalho, L. S., & Stephan Meier, a. S. (2016). Poverty and Economic Decision-Making: Evidence from Changes in Financial Resources at Payday. American Economic Review , 106, 260-284.
Plantinga, A., Krijnen, J. M., Zeelenberg, M., & Breugelmans, S. M. (2018). Evidence for Opportunity Cost Neglect in the Poor. Journal of Behavioral Decision Making , 31, 65-73.
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