Easy to Understand Example of Opportunity Cost

My wife was talking to a friend about daycare.

Her friend works four days and is off one day a week.  She was disappointed she couldn’t find a daycare that would let them pay for four days a week.   They would have to pay for five, even though they would use the daycare only four days each week.

My wife explained that if they didn’t pay for five days a week, the daycare center could easily find another kid to fill the slot for five days a week so the day care center could maximize their sales, but it would be much harder to find parents needing to use the daycare just one day week, that happened to coincide with her day off.

I heard her say that and tried to explain to her that she understands the economics concept of opportunity cost.  The opportunity cost of the daycare would be forgone revenue of a five-day-a-week child, when they have the capacity for that, to accept the four-day-a-week child.

I went on to explain that if you could find a daycare that would take her money for four days a week, then she might want to consider taking that as a sign that daycare may not be very good, so paying more for the 5-day day care would be well worth it.

3 thoughts on “Easy to Understand Example of Opportunity Cost

  1. i dont understand how the ‘quality’ of the daycare can be determined by thier pricing structure.
    i think i understand the opportunity cost part. why does the business pass that cost along to the consumer?

    if i were in the storage business, and i had a 10×10 storage space, would i reduce your rent if you only needed to store a shoebox?

  2. Hi dave: If the daycare has flexible pricing structure to accept a four-day a week kid, that daycare’s opportunity cost is lower. Which means fewer people are trying to get their kids into that daycare, which could mean that the daycare doesn’t have a good reputation. It could also mean other things. The daycare might be brand new and still trying to build a reputation or it could be located in a town where a lot of people work four days a week. But, it’s worth considering why they are so flexible.

    “why does the business pass that cost along to the consumer?”

    Because there’s another consumer willing to pay the 5-day-a-week price. The opportunity cost isn’t the cost of staffing. The opportunity cost is giving up the revenue from that other consumer.

    “ould i reduce your rent if you only needed to store a shoebox?” Not as long as you have others willing to pay the 10×10 rate.

  3. Pingback: 2010 in review « Our Dinner Table

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