By Logan Baker (Creighton University)
When drinking a can of Coca-Cola, it is easy to get lost in the taste while disregarding the economics behind purchasing the Coke. Let’s be honest, we disregard the economics of most things. If we think about it, there is a particular reason for the soda’s price and the store you found it in. Additionally, there is a reason for me to buy it and consume it as often as I do. It’s more than simply handing $4.99 to a Target cashier while I walk out the door with twelve cans of my favorite drink. This seemingly small purchase has opportunity costs and incentives working tirelessly behind the scenes.
Every decision has an opportunity cost. The opportunity cost is not just whatever else I could have spent with my $4.99 that I chose to use on Coca-Cola. In economics, we talk about opportunity costs quite a bit. They are, essentially, the costs of the missed opportunities. Clever, I know.
The explicit cost is the money I spent. I could have saved that money and done anything else that I wanted to with it. I could have put it into a savings account and watched it grow over the years (although that would yield very little). I could have purchased candy, bread, or milk. The nearly five dollars that I gave up was the explicit cost. The implicit cost takes more digging to identify. I chose to drive ten minutes to Target, buy the twelve-pack, and return home. In total, this uses about twenty-five minutes of my time. This is an implicit cost. I could have used this time to do a workout, spend time with family, or anything else that could be done in the allotted time. Whether or not I deeply thought about the decision, I deemed this Target trip to be the best use of my time. I forfeited $4.99 and twenty-five minutes. That is the opportunity cost of obtaining this good in this specific scenario.
Incentives play a role as well. As I mentioned, I decided to go to Target instead of spending time doing anything else. Actions align with incentives. Internal motives drive what people do whether it is as major as deciding which company to work at for years or as minor as buying soda to drink for moments. I decided that I was thirsty, and I wanted something more flavorful than water. My incentive to give up the nearly five dollars and twenty-five minutes was the fact that it would give me something sweet to drink. The situation is more complex than it may seem because I am not the only one in this scenario with incentives.
Adam Smith declares that “it is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interests.” What about the worker who built the machines in the factory that the Coke is produced in? Perhaps their incentive is to provide food and shelter for their families and the money from building the machines will help them pay for that. Their personal incentive helped put that twelve-pack in my fridge. What about the cashier working in the check-out aisle? Perhaps the teenage worker wanted to see the newest horror movie with her friends the next weekend and needed the funds from her shift that day to purchase the tickets (one can even speculate the opportunity cost that she made to be working at Target instead of unemployment or any other job). One can speculate what their incentives are, but it is certain that they had incentives for the role they played in making the product available to me.
Both incentives and opportunity cost are typically things that I leave out of my conscious decisions. However, they apply to everything whether I am consciously considering them or not. The economic way of thinking allows one to more effectively determine the implications of their decisions. Opportunity cost and incentives are just two pieces to the mosaic of economics, but they are major pieces nonetheless.