Monday, January 26, 2009

Opportunity Cost, Does it Pay To Make Your Own Beer

Tomorrow is the first day of class for me (thank you January term), on the first day in intro to economics we usually teach the concept of opportunity cost. The idea is that cost of something is not only what you pay for it, but also what you could have had instead. If I go to a lunch with my colleague, I give up eating lunch while reading blogs.

Let’s take for example making your own beer. In a great post about a beer brewing economist, from Patrik Emerson at the Oregon Economics Blog, he points out that buying the ingredients to make your own beer cost about as much as beer from the liquor store.

For me my ingredients are usually slightly cheaper, and beer seems to be closer to $8 a six pack in the store (with tax). So I guess I’m saving about $5-10, for making my own beer. But wait, I have to spend all that time making it (probably about 5 hours of labor), when I could have been working additional hours. Luckily, I get paid more than $5-10 an hour, so traditionally economists would say, l’m losing money by making my own beer. Since there is the opportunity cost of my time in my beer production (I could have instead made more money giving extra lectures during the January term).

Now here’s another thought. For me beer making is leisure. Instead I could have gone to a couple of movies, purchased and read a book, or gone golfing. So by doing a leisure activity that produces benefits (ignoring opportunity costs), I’m actually coming out ahead.

If that does not quite make sense, do as the homebrewers do and “Relax have a home brew”
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