Ignoring Opportunity Costs
Pitfall #1: Ignoring Opportunity Costs Opportunity cost – value of the next best alternative that must be forgone in order to engage in a particular activity. · Using a good we already own is not free o Possible sales proceeds = opportunity cost Opportunity Cost Over Time · Pay now or pay later? ... Loan Interest Rates o Banks pay interest to depositers to compensate them for not using their money right away Summary o It is important to account for all relevant opportunity costs Pitfall #2: Failure To Ignore Sunk Costs Sunk Costs and Decision Making o Sunk costs are those costs that will be incurred whether or not an action is taken o E.