Thursday, May 20, 2010

Priorities: Opportunity Costs

My friend recently found out (quite by accident) that the apartment complex he lived in has stopped their nightly Security Patrol of the grounds due to cost cutting measures. Their apartment is in a pretty safe neighbourhood but recently they had begun to notice strange men in the compound late in the evening and decided to complain to the management, and that is when they found out that the security patrol had been stopped. My friend was indignant that they were not informed about the security patrol. Moreover, he complained to me that the apartment management was simply fattening their profits by removing essential services. It made him angrier still that the apartment complex was spending money to dig up and rebuild a perfectly good pool side. 
While I agree with him that the apartment management should have informed the residents about cancelling the Security Patrol, and I personally would prefer the Security Patrol over renovations to the pool, I am not sure his economic reasoning is entirely correct. The apartment management may be cash strapped and unable to pay a recurring amount every month to the Security Agency; however,  they may still have funds to perform one time modifications to the pool area. Since the management does not guarantee any security, and the lease states that renters are responsible for their belongings, I am not sure they could be held liable. Besides, other residents may have shown a preference for a better pool area. 
My friend, nevertheless acted exactly how consumers respond in a market: he put in his notice to vacate and is moving to a gated community. His priorities are security, and he responded to the situation aptly. For him, the opportunity cost of the extra rent he would pay (33% higher than earlier) in the gated community is less than that of not having a security patrol. This is another example of consumers in the market constantly take decisions based on their opportunity costs, only we call it priorities instead of opportunity costs. 

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