Students at Muscatine High School have a two-hour fourth period. The two hours are divided into a 30-minute lunch, a 30-minute tutorial, and an hour class. Ask any student at MHS if they like their tutorial and they'll say they hate it. Ask any teacher if the tutorial is beneficial, and they are likely to tell you that's a waste of time. So why don't students want to buy their way out of tutorial to attend a concert?
For the last week, students have had the chance to buy their way out of their tutorial for a $1, yet only 40 tickets have been sold in a school with a population of 1,700. I think the answer has to do with the present value of money.
Economists like to say that consumers have to make choices with their money. When they make a choice, they must give something up. What they give up is called opportunity cost. We like to measure that cost as the next best alternative for a choice. Thus, if I watch the Sorpanos, I must give up going to my son's baseball game. In other words, choice involves cost.
Is it possible to measure the cost without knowing the next best alternative? For example, suppose I had a $1. Do I want to spend it now or spend it a week from today? Economists like to say that a dollar today is worth more than a dollar a week from now. The concept of present value supposedly grasphs this idea. If you love math, then you'll love this so hold on.
The present value of money is equal to: PV = A/(1 + R) where A is the amount of money, R is the rate of interest, and PV equals the present value. In this example, the rate of interest is equal to the opportunity cost of having a dollar now. Let's plug in numbers for the variables. Assume that it costs a dollar to go to the concert and students discount the future by 10%. The present value of the dollar is: .9090 = 1/(1+.10). Thus, a student values a dollar about .90 cents now. The .09 cents difference is how much interest the student gives up in opportunity cost.
What this formula shows me is that a student wants the use of the dollar now and is willing to forgo the opportunity to have the dollar later. This is a problem when the costs and benefits arrive at different times as in the case of my concert. Economics is how people behave to satisfy their wants and needs. On Monday, Sheri Swailes was selling cookies and brownies for student council. Her goodies sold for .50 cents and students could eat the treats a second after purchasing. I'm sure each student rationally compared the relative cost of the treats to the concert tickets and found that they could buy two goodies for one ticket. Thus, the goodies were cheaper relatively.
But, how much were the students willing to give up in opportunity cost to eat the treats now? Let's return to present value. Our equation becomes PV = 1/(1+R) or .50 = 1/x. Now, multiply both sides by x and the formula is: .5x = 1. Divide both sides by .5 and you are left with: x = 1/.5 or x = 2. This means that students will discount my concert 200% in order to consume cookies now instead of buying a ticket later. That's a high opportunity cost to bear. For Ms. Swailes that's good.