Cost benefit analysis

The cost benefit analysis is an important keypoint in economics. In order to explain this to you as easy as possible, I will make another example on how this works. It's actually very easy and you probably already know what it's all about.


Sidejob:

• Earnings: 300$ per month
• You work 8 hours a week in an office
• Boring but not exhausting work

Let's say your parents come up for all your basic needs, but if you have extra wishes (like watching that awesome movie) you will have to pay for it yourself. A side job now has the benefit that you will have some extra money that you can spend how you want. On the other hand, you now have 8 hours less a week, these are your "costs".
In order to say if its a good idea to do the side job, we have to think about what you would have done in the mean time instead of working.

Let's say you would have studied. Since the work in the office is also not that exhausting, we can easily compare those two things. But: Since you have 8 hours less each week to study, there is a reasonable chance that your studies will extend for 1 year.

This means that in the meantime you will earn 4x12x300 = 14.400$ in those 4 years of studying and working in the office. But on the other hand you could have earned easily 25.000-30.000$ in the fourth year if you would have finished your studies in 3 years.

This means that the salary of this lost 4th year counts as costs. Costs that come up because you didn't take an alternative are called alternative costs / opportunity costs.

Also, we need to take in consideration the costs that will occur for others:

• Depending where you study, the state has to pay for your studies for another year
• Your parents will have to come up for your living for another year

Now I am not saying that you shouldnt work during your studies. But if you get the opportunity to do something that is interesting or even has to do with your studies, do that. You might build up useful relationships and get an idea of what you will be doing after university.