Opportunity Cost and Normal Profit: Using Media to Teach Economics

Tod S. Porter, Youngstown State University
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This material is replicated on a number of sites as part of the SERC Pedagogic Service Project
Initial Publication Date: October 12, 2010

Summary

drugs
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.

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Learning Goals

The activity has the following goals:
  • Provide students with a better understanding of the concepts of opportunity cost and normal profit (depending on the point at which the activity)
  • Give students practice in Hansen proficiency #5 (applying existing economic knowledge)
  • Demonstrate the relevance of economic theory to a policy problem
  • Help to sustain student attentiveness by inserting the news story into the class presentation

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

  • To play the story for the class the instructor will need to have a classroom equipped with a computer with access to the internet. The sound system of the computer must be loud enough for all students in the class to hear the story.
  • After describing the concepts of opportunity cost or normal profit the instructor will direct his or her internet browser to the story "RX Drug Costs" on the National Public Radio web site. Playing the story will take approximately 4 minutes.
  • After listening to the story students are asked to discuss the questions listed in the assessment section. If a more formal assessment is desired students can be asked to hand in written answers. The discussion will take about 5 minutes.

Teaching Notes and Tips

  • A convenient way to store the url is to embed a link in a PowerPoint slide. The slide should also include the title and source of the story, the date it was broadcast, and the broadcaster's description of the story. It's also convenient to include the discussion questions on the following slide.
  • Check your browser to make sure that it will play the story prior to class. One occasional problem is that the browser will require that the multimedia player for the browser be updated prior to playing the story (this is more likely to happen if the multimedia player hasn't been used for a while, such as at the start of a semester). You don't want to waste class time on this so make sure everything works before class starts.
  • Students should always have to answer questions after the news story is played (either informally in a class discussion or in some kind of written assignment) so there is an incentive to pay attention.
  • Initially it may feel awkward to play a news story because there isn't anything for you to do while the story is played. Find a corner of the classroom and relax; you don't always have to be the center of attention.

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.