Basic Economics - Opportunity Costs (Trade Offs)

What are opportunity costs?

Opportunity costs are those costs that are associated with a gain or a loss of revenue or income as a result of the choices you make.

For example:  going to college or not going to college

Let's look at not going to college first    

You are 18 years old and will be earning $24,000 annually and after 10 years your wages increase by $500/year.  After 20 they increase by $1,000.  After 30 they increase by $1,500.  After 40 they increase by $2,000

18-28 =  $240,000 first 10 years
28-38 =  $245,000 second 10 years
38-48 =  $345,000 third 10 years
48-58 =  $360,000 fourth 10 years
58-68 = $600,000 fifth 10 years (at 68 you retire)
             $1,790,000  Total lifetime earnings (+/-)

Let's Look at going to college

You are 24 years old and your first job earns you $50,000/year because you have a Masters's Degree.  After 10 years you receive a $1,000/year increase.  After 20 years you receive a $1,500/year increase.  After 30 years you receive a $2,000/year increase.

18-24 =  ($200,000) college loan plus 6 years of lost wages ($144,000) or ($344,000)

24-34 =  $500,000 first 10 years

34-44 =  $600,000 second 10 years

44-54 =  $750,000 third 10 years

54-64 =  $990,000 fourth 10 years (you retire at 64)

              $2, 840,000  Sub-Total lifetime earnings (+/-)

                   ($300,000) Tuition Loan plus interest

                   ($144,000)  Lost wages while in college

                   ($444,000)  Opportunity cost

              $2, 396,000

A college graduate with a Masters's Degree will earn (on average) $600,000 more than someone who decided not to go to college.  However, this amount is cut in half if a college graduate stops after receiving just their Bachelor's degree.  This means there is another opportunity cost of not going to college for 2 more years.

The difference between going to college and not going to college can be offset again by finding different ways to invest one's excess monies whether it be in the Stock Market or in Real Estate.  Many people who do not go to college end up receiving trade skills either by investing their own money or by finding employers who will give them the money or train them on the job.  Many of these people end up investing in real estate because they can provide the labor themselves.