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Opportunity Cost and Normal Profit: Using Media to Teach Economics

Tod S. Porter, Youngstown State University
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This material was originally created for Starting Point: Teaching Economics
and is replicated here as part of the SERC Pedagogic Service.

Summary

After lecturing on the concepts of opportunity cost or normal profit, the instructor plays the story "RX Drug Costs," which was broadcast on the National Public Radio news program All Things Considered. Two individuals are interviewed in the story: a spokesman for the public interest group Public Citizen, who argues that drug companies overstate the costs of drug development, and a spokesman for the drug companies who claims they do not.

Much of the difference in the estimates of how much it costs to develop new drugs is due to foregone earnings on the money invested in drug research. The Public Citizen spokesman argues that the foregone earnings should not be included, while the representative of the drug companies say it should. The story can be used to discuss whether firms should consider the opportunity costs of investments in research and development and the concept of normal profit.

Learning Goals

The activity has the following goals:

Context for Use

This is an in-class activity designed for principles of microeconomics. It would be appropriate for use in any class size and any type of institution. The presentation of the news story could follow the description of the concepts "opportunity cost" or "normal profit."

Description and Teaching Materials

Teaching Notes and Tips

Assessment

An informal assessment of the students' understanding can be achieved through a class discussion. Alternatively, students could be asked to write down answers to a set of questions either on their own or in groups. Questions that can be asked include:
  1. The spokesman for Public Citizen argues that, using the drug company's logic, the cost of buying a car should include the interest that you did not earn because you used the money to buy a car instead of leaving it in a savings account. Is the spokesman correct? If you don't think so, how is buying a car different from making a business investment?
  2. What do you think would happen if drug prices were regulated so that the price of the drug would not cover the opportunity cost of the investment (the interest the firm could have earned by investing the money elsewhere instead of using it to develop the drug)?
  3. (If using the story after discussing normal profit) Is the foregone interest an implicit cost or explicit cost? Will the firm's accounting profits be reduced by the amount of interest it could have earned? If the interest the firm gave up was $5 million and it earned an accounting profit of $4 million did it earn an economic profit?

References and Resources

Media for Microeconomics is an annotated database of news stories that illustrate the concepts covered in principles of microeconomics. Users can search for stories by topic, length, and type of media (video and audio). Users can also recommend stories for inclusion in the database.

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