Opportunity cost

The smaller the opportunity cost, the greater the comparative advantage. For example, if you buy a car and use it exclusively for travel, you cannot rent it, whereas if you rent it you cannot use it for travel. More simply, it means you give up one thing for another.

However, time spent chasing after an income might have health problems like in presenteeism where instead of taking a sick day one avoids it for a salary or to be seen as being active.

From the traceability source of costs, sunk costs can be direct costs or indirect costs. If the sunk cost can be summarized as a single component, it is a direct cost; if it is caused by several products or departments, it is an indirect cost.

Analyzing from the composition of costs, sunk costs can be either fixed costs or variable costs. When a company abandons a certain component or stops processing a certain product, the sunk cost usually includes fixed costs such as rent for equipment and wages, but it also includes variable costs due to changes in time or materials. Usually, fixed costs are more likely to constitute sunk costs.

Generally speaking, the stronger the liquidity, versatility, and compatibility of the asset, the less its sunk cost will be.

A company used $5,000 for marketing and advertising on its music streaming service to increase exposure to the target market and potential consumers. In the end, the campaign proved unsuccessful. The sunk cost for the company equates to the $5,000 that was spent on the market and advertising means. This expense is to be ignored by the company in its future decisions and highlights that no additional investment should be made.

Despite the fact that sunk costs should be ignored when making future decisions, people sometimes make the mistake of thinking sunk cost matters. This is sunk cost fallacy.

Example:Steven bought a game for $100, but when he started to play it, he found it was boring rather than interesting. But Steven thinks he paid $100 for the game, so he has to play it through.

Sunk cost: $100 and the cost of the time spent playing the game. Analysis: Steven spent $100 hoping to complete the whole game experience, and the game is an entertainment activity, but there is no pleasure during the game, which is already low efficiency, but Steven also chose to waste time. So it is adding more cost.

The concept of marginal cost in economics is the incremental cost of each new product produced for the entire product line. For example, if you build a plane, it costs a lot of money, but when you build the 100th plane, the cost will be much lower. When building a new aircraft, the materials used may be more useful, so make as many aircraft as possible from as few materials as possible to increase the margin of profit. Marginal cost is abbreviated MC or MPC.

Marginal cost: The increase in cost caused by an additional unit of production is called marginal cost. By definition, marginal cost is equal to change in total cost (TC) (△TC) divided by the corresponding change in output (△Q) : Change in total cost/change in output: MC(Q)=△TC(Q)/△Q or MC(Q)=lim=△TC(Q)/△Q=dTC/dQ(△Q→0) (as shown in Figure 1)

In theory marginal costs represent the increase in total costs (which include both constant and variable costs) as output increases by 1 unit.

Using the simple example in the image, to make 100 tonnes of tea, Country A has to give up the production of 20 tonnes of wool which means for every 1 tonne of tea produced, 0.2 tonne of wool has to be forgone. Meanwhile, to make 30 tonnes of tea, Country B needs to sacrifice the production of 100 tonnes of wool, so for each tonne of tea, 3.3 tonnes of wool is forgone. In this case, Country A has a comparative advantage over Country B for the production of tea because it has a lower opportunity cost. On the other hand, to make 1 tonne of wool, Country A has to give up 5 tonnes of tea, while Country B would need to give up 0.3 tonnes of tea, so Country B has a comparative advantage over the production of wool.

Much like individual decisions, it is often the case that governments must consider opportunity cost when enacting legislation. Taking universal basic healthcare as an example, the opportunity cost at the government level is quite clear. Assume that implementing basic healthcare would cost a government $1 billion: the explicit opportunity cost to implement such legislation would be a combined $1 billion that could have been spent on education, housing, transport infrastructure, environmental protection, or military defence, for example. For this particular scenario, the implicit cost is quite minimal. Only the cost of producing such legislation through human labour and the time of production would need to be accounted for.