Question #2b113
1 Answer
Opportunity cost applies to everything, including these examples; and the short answers are: yes, and yes!
Explanation:
Opportunity cost refers to the special way that economics treats cost -- as a measure of everything given up to pursue an alternative. The opportunity cost of investing in physical capital consists of everything we cannot do as a result of that investment.
Consider a large building as an example of physical capital. If we build the large building, we cannot use the land for farming. That's part of the opportunity cost. We also cannot use the concrete in the building to line a swimming pool in my backyard - what a shame! That's also part of the opportunity cost. We cannot use the labor used to construct the building to assemble cars. That's part of the opportunity cost. We break down every resource used and realize that we cannot use that resource for something else. That's opportunity cost.
We could apply a similar logic to investing in human capital. The most obvious resource for this is time. If we consider an education system as an investment in human capital, we can also see that physical capital is often required to invest in human capital, so we could add those costs, too.
From an individual point of view, we each invest our own time in building our own human capital. But, we should probably consider all the other costs that contribute to our own human capital, too, even if we do not, individually, bear all those opportunity costs ourselves.
Now, about over-investment: think of it as a cost-benefit analysis. So, of course it is possible to over-invest, if the benefits we reap from the investment fail to reach the level of our opportunity costs.
All factors of production face declining marginal productivity. If we add physical capital in an economy, we generally get more production. But, we get more production at a declining marginal rate. In other words, creating the first factory adds a lot of productivity, but creating the millionth factory would not add as much productivity.
Human capital over-investment is a bit harder to see -- because I always seek to learn more. However, I played soccer in high school and college, and this provides an example. Sports skill is a form of human capital, the ability to produce something. In my case, I'm approximately 5'9" tall and have rather small hands. I make up for these handicaps by being not particularly quick or agile, either. You might wonder why I bothered playing sports at all, much less trying to play goalkeeper. Well, I found that with a lot of investment, I could be mediocre! Eventually, I had to face the fact that I was over-investing in that particular aspect of human capital. I would never play at a high enough level to make a living, for example.
I invested more heavily, eventually, in applied mathematics and economics training, a very different form of human capital. The benefits to me were obviously higher. But could I over-invest? Yes, because I value leisure time, too. Eventually, I trade off more leisure time for less income, and you can see that it is possible to over-invest in human capital, because we might value the benefits less than the opportunity costs.
Long answer, but this has several long questions!
