Thursday, January 14, 2010

Greekonomics 101 - Opportunity Cost

I had a flash of inspiration last night when trying to come up with what my approach would be with this blog. I've decided to come at it from the approach of an economist, and try to use frequent flyer examples to illustrate some fundamental economics concepts. Today's post will be the first, and it has to do with the concept of opportunity cost. Wikipedia defines opportunity cost as "the value of the next best choice available to someone who has picked between several mutually exclusive choices." Do you pick the cheesecake or the creme brule at your local eatery? You'll enjoy the cheesecake but you gave up the potential enjoyment of the creme brule. Do you pick the Lexus or the Inifiniti at the dealership? If you pick the Infiniti, you get the benefits of that vehicle but you give up Lexus' "relentless pursuit of perfection." (whatever that means - I don't drive a Lexus).

For the Greekquent Flyer, it's about whether I pay cash for the ticket or use my points. For example, if I use 25,000 Continental miles for a coach ticket from New York to Los Angeles, I'll be saving the cost of the ticket. HOWEVER, I will be giving up the miles I would earn in the FF program. If I am a regular member, then I would lose about 5,000 FF miles for the round trip. However, if I am a Gold or Platinum OnePass member, I lose about 10,000 FF miles AND the opportunity to upgrade for free on both legs of the flight. What you see is that typically, your opportunity cost is higher 1) the higher your status in a program and 2) the longer the flight and 3) on flights that are upgradable. Therefore, the Greekquent Flyer typically doesn't use miles for NY to LA flights, but will likely use them for a short hop on an all-coach regional jet between Houston and Pensacola.

NB: The Greekquent Flyer gives a shout out to his actual Economics 101 professor, Michael Boskin - Hoover Fellow and Economist Extraordinaire at Stanford. Professor Boskin has recently written some excellent op-ed pieces in the Wall Street Journal.

2 comments:

  1. Greetings Greekquent. Good idea and there's always room for more bloggers. This is Randy Petersen, the founder of FlyerTalk.com and BoardingArea.com where Gary got his start with View From the Wing. If you'd like some help and support while growing your blog, you might considering moving it over to BoardingArea where you'll b in front of like-minded frequent flyers looking for good posts to read. Let me know, it's east to move from blogspot to BoardingArea.

    Cheers,
    Randy
    randy at boardingarea.com

    ReplyDelete
  2. Hi Randy,
    I'd be honored to move my modest little blog over to Boarding Area. Please let me know what I need to do.

    Many thanks,
    Greekquent Flyer

    ReplyDelete