In microeconomics, opportunity cost refers to the value of the best forgone choice, if the choices are mutually exclusive, e.g. one has a choice of watching a football game or going for a walk with girlfriend and decides for the latter, value of watching a football game is the opportunity cost.
Timothy Taylor in his blog article presents the examples of how the same (in terms of dollar value) opportunity cost may be perceived in different ways depending on the context. I believe that this phenomenon relates to marketing and psychology rather than to classical economics. In the case with stereo system a rational person should have perceived 20 CD’s to be better than $300 only if he found those CD’s more valuable than $300, in which case he or she should have bought those CDs in the first place. Since that person has never thought of buying 20 CD’s, being persuaded by that salesperson’s move is a demonstration of irrational behaviour. But people are not rational, and the question is: how exactly these manipulations with opportunity cost work. In my opinion, perception of opportunity cost as higher than it actually is related to the mood a person is in. It is not that a buyer of stereo system always values 20 CDs over $300 – he/she does so when he is in a “music listening mood”: he/she is so much excited by the idea of having quality sound in his home, that everything related to it is somehow worth more, including CDs.
Exactly the same applies to De Beers’ ad that diminishes opportunity cost of renewing furniture when buying diamonds: I do not believe that people were constantly affected by this advertisement. It worked only when people were in romantic mood, when their feelings above their beloved ones were stronger than taking care of everyday routine, and this pushed them towards an irrational (as in normal state they prefer furniture over diamonds) decision to go and buy diamonds.
Finally, Eisenhower’s count of things that could have been produced/build instead of military strengthening appeals to people who are from the beginning unimpressed with country showing their muscles and aims to enhance emotional response by mentioning peaceful contribution to society as opportunity cost.
The same opportunity cost may have different value across individuals because individuals have different preferences and therefore assign varying values to the same goods/services. Furthermore, as the examples show, same individual may apply different value to the same option depending on his/her mood.
Works cited:
Social Justice Speeches – EdChange Multicultural Pavilion. “The Chance for Peace”. http://www.edchange.org/multicultural/speeches/ike_chance_for_peace.html
Taylor, Timothy. “The Persuasive Power of Opportunity Costs”. Conservable Economist. July 21, 2011. http://conversableeconomist.blogspot.com/2011/07/persuasive-power-of-opportunity-costs.html
