What’s the deal with ‘Economic Cost?’

Traditionally defined, an opportunity cost is the cost of something in terms of an opportunity forgone. It refers to the benefits that could have been obtained by choosing the best alternative opportunity. Opportunity costs include both explicit (direct monetary charge) and implicit (alternative use of a readily available resource) expenditure.

A sunk cost is a past cost that cannot be recovered and rational economic agents should not be influenced by sunk costs. Fancy an alternative explanation? Read on.

Ken has it all figured out. He wants to write the first in a series of autobiographies entitled “The Magnificent Story of Ken: A Brief
Overview: Part 1.” He reckons that more is always better and intends to surpass the Harry Potter saga in pages and popularity. Let us track his progress.

Ken loses his job, his boss hires a howler monkey as his replacement. Barbie yields, seeks permanent solace at Blaine’s. Ken believes he has passed the point of no return, his obsession intensifies.

1st month: Ken goes to work during the day, composes his masterpiece in the study at night. His wife, Barbie is content, has no complaints, allows him to indulge in his passionate writing.

3rd month: Ken’s performance at work deteriorates, his boss threatens to sack him. Barbie feels overlooked, seeks solace at Teresa’s. Ken knows he ought to take a break from the writing but thunders on.

6th month: Ken loses his job, his boss hires a howler monkey as his replacement. Barbie yields, seeks permanent solace at Blaine’s. Ken believes he has passed the point of no return, his obsession intensifies.

An opportunity cost is considered before making a choice. A sunk cost is realized after. Indeed, we often neglect or choose to ignore the true economic cost of making a decision.

12th month: Ken’s unemployment benefit runs out, he is no longer receiving any income (his vital sustenance is provided by the plentiful of rodents that scurry about the forsaken house). His appearance is akin to a zombie, yet his mind is flourishing, the steady stream of words, now a torrent.

Nth month: Ken has done it! Part one of his masterpiece will soon be unleashed onto the world. But at what cost?

Assuming Ken loves his job, his wife and his health equally (do not tell the wife), these are his next best alternatives and therefore the opportunity cost he must bear for not allocating his time for them. An opportunity cost is considered before making a choice. A sunk cost is realized after. Indeed, we often neglect or choose to ignore the true economic cost of making a decision.

So what happened to Ken? Obviously, his book became a bestseller. Now wealthier than J.K. Rowling, he has no regrets and has willingly accepted all the costs and lives happily ever after.