Accounting for Prudent Choice:
Conclusion & Summary

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Conclusion

So, to repeat: Is a college education worth the time and money it costs? The notion of full cost, better known as opportunity costs, helps answer. It suggests that you need to look beyond the money price tag and take into account the benefits of all the things you have to give up to go to college. An income statement and a balance sheet helps, too. The asset value of a college education is large, a mental machine that earns over a lifetime money income and, perhaps more important, life satisfactions in understanding and appreciating the world. But it may also require borrowing a lot of money ($18,000 per year in the U.S., on average) or giving up the income and experience of a full-time job. For some people the expected benefits of staying in school don't offset the opportunity costs. Michael J. Fox never finished high school, because he was getting movie parts as a kid.

Any choice is a matter of taste and constraints. The "taste" of a business is usually summarized by its bottom line - that is, its taste for profit. But the tastes of a person are more complex, and the "tastes" of a nation arguably meaningless. The production possibilities curve nonetheless indicates a nation's production "menu" and opportunity costs. Which point person chooses is determined by her tastes. Maybe or maybe not the analogy to a nation can be used, as economists have been claiming it can be.

Summary

  1. A fundamental microeconomic question is: "Why do people do what they do?"
  2. Scarcity dictates that we make choices. We can't have everything we want. In order to acquire more of one good, we have to forgo the benefits of other goods.
  3. A prudent choice is the best choice given one's own tastes (internal factors) and constraints (external factors).
  4. The full cost of a choice is more than its monetary price. It includes the opportunity cost of the choice---that is, the benefits from what would be the next-best opportunity.
  5. Accounting is a way of measuring at least the history of constraints. It's not forward looking, as the production possibilities curve is. The flow of expenses and income is recorded on the income statement; the stock of assets and liabilities is recorded on the balance sheet. Wealth is the net stock; savings consist of the difference between the flow in and the flow out. The amount of savings indicates the change in wealth.
  6. Companies of course rely on accounting as an aid in their decision-making. Retained earnings are the savings of a business.
  7. Together, opportunity costs and accounting help consumers, businesses, and nations to evaluate the choices available to them.
  8. Social choices can be thought of, and are by some economists, as analogous to personal choices. Societies, the economists say, have tastes (about, say, food and defense) and are constrained by what they can produce based on their current resources and technology. A society's production possibilities curve describes the constraints.
  9. A major argument in favor of the notion of "prudent choice" is that it has proved out. It works, for an awful lot of economic behavior