Wednesday, July 20, 2005

Economists & Costs

A real economist recognizes a cost when he sees it -- and he knows that costs aren't always measured in dollars (or euros, or yen, or lira or yuan).

When we talk about the cost to obtain something, we don't simply mean "how much money do I give for that item?" We include everything that is required to obtain that item as its cost. Costs may also differ for individuals, even for the same item at the same monetary price. Perhaps I consider my time more valuable than you consider yours - in terms of time, my cost is higher. In analyzing whether this is a cost that we should bear, we ask "how much effort am I willing to put into obtaining said item, how much risk am I willing to take, how much time am I willing to spend or how long am I willing to wait?" In short, we ask if the payoff (or total benefit) is higher than the total cost. A real economist knows that cost is more than just money. Cost is anything that we give up, be it money, time, security, or other things that we could be doing.

When I wait in line at the grocery store, that's a cost to me in addition to the price I pay for my groceries. I'd be willing to pay more in dollars for the groceries if I didn't have to wait in line.

When I decide not to buy health insurance, that's a cost to me in terms of the risk or lack of security I face by not owning insurance. When I choose not to purchase insurance, it means that the dollar amount of the insurance policy exceeds the value that I place on not having to worry about my health.

The same is true for payoffs -- when I refer to profits and payoffs, I could mean money, but not necessarily. When considering a job, do you only look at the salary? Or do you look at how much free time the job allows you, whether you like the people with whom you will work, whether you enjoy the job itself, whether your office has a window, etc? Payoffs can be in the form of psychological benefits, good relationships, leisure, security, or anything that you value.

Don't make the common mistake of thinking solely in dollar terms. Costs & payoffs are more than just money given up & money gained.

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