Introduction
Whenever a person makes a purchase, he gets a feeling of joy or happiness from the purchase. This is known as consumer satisfaction. Consumer satisfaction is a term used in Marketing to define the level of satisfaction that a person derives from consumption or use of a product. Often a person goes without one product in order to purchase another. An example of such a purchase would be a woman foregoing a new dress in favour or school books for her child. This is called the opportunity cost of the books. It measures the dissatisfaction of not having the dress as against the satisfaction of providing for her child. (Gitman and McDanniel, 2005).
Definition of Opportunity Cost.
Opportunity cost is not the real fiscal cost of a product nor even the difference in cost of the product purchased and the product sacrificed. It is a measure of the level of satisfaction of purchasing one product as against the dissatisfaction of not purchasing the other. James Buchanan, in his article The New Palgrave Dictionary of Economics Online defines opportunity cost as “Opportunity cost of a product is defined as the cost of the alternative which is foregone.” (Buchanan, 2008). Opportunity cost is therefore a very subjective concept which differs from one person to another and from one circumstance to another. In his article “The Persuasive Power of Opportunity Costs,” Timothy Tylor quotes three examples by Shane Fredrick which show how pointing out the alternative can define the opportunity cost of a product.
Example 1 – Explicit Opportunity Cost
In this example Fredrick cites his own example when he could not decide whether to purchase an attractive Pioneer stereo at $1000 or the less expensive Sony at $700. Fredrick had the choice of saving $300 for a future purchase as against the satisfaction of owning a better looking stereo. When the salesperson suggested that he purchase the Sony along with $300 worth of CD’s he explicitly defined the opportunity cost and this helped Fredrick make his decision. (Tylor, 2011).
Example 2 – Minimizing the Opportunity Cost
Here Fredrick describes the ad by De Beers where they minimize the dissatisfaction of redoing the kitchen as against the joy and pride of buying a pair of earrings. Here the cost of renovation has been shown to be much lesser than it actually is. (Tylor, 2011).
Example 3 – Political Example
In the third example Fredrick compares the satisfaction of having peace in the country by providing ammunition for the forces against the need of the people for food and other infrastructure. This example compares the need rather than the satisfaction of the consumer. Both peace and amenities are necessary but which need is greater? (Tylor, 2011).
Conclusion
The three examples quoted by Tylor clearly bring out the subjective nature of opportunity cost. The opportunity cost of a product differs from one person to another, as the satisfaction derived from a product by two different persons cannot be the same. Take for example a cup of coffee. One person may be a regular coffee drinker while another may prefer tea. Even for the coffee drinker, the satisfaction derived from a cup of coffee at different times may be different. Thus we conclude that opportunity cost is different for different people at different times. (The Economists, 2010)
References
Timothy Taylor (July 21, 2011) The Persuasive Power of Opportunity Costs
James M. Buchanan (2008). "Opportunity cost.” The New Palgrave Dictionary of Economics Online (Second ed.). Retrieved 2010-09-18.
Gitman, Lawrence J.; Carl D. McDaniel (2005). The Future of Business: The Essentials. Mason, Ohio: South-Western.
"Opportunity Cost". Economics A-Z. The Economist. Retrieved 2010-09-18.
