The Economy & You #20 – Prince Fielder and Opportunity Cost

Fielder Coming Up (Photo credit: Jibby7)

One of the most fundamental economic concepts is opportunity cost. Opportunity cost is the alternatives we give up when we make a choice or decision.  Almost all decisions involve trade-offs.  The total “cost” of selecting a specific choice has to include what was given up by not choosing the next best alternative. The opportunity cost of going to college must include the income that would have been earned by working instead of going to school.  The opportunity cost of watching television includes the time that could have been spent doing other things.  From a society standpoint, the opportunity cost of purchasing more parkland would include other government goods and services that could have been purchased like a snow plow truck or another police officer.

These opportunity costs exist because resources are limited (scarce is the term most used). Time, which is one of our most important resources, is limited.  Everyone has only 24 hours in a day, and must decide what activities they want to do during that time.  By doing so, people make decisions that have opportunity costs.

Opportunity costs are often easier to understand with a numerical example. So, in this example, I will use the Milwaukee Brewers and Prince Fielder.  In 2011, the Brewers paid Fielder $15.5 million.  The $15.5 million salary made up roughly 18% of the entire team payroll of $85.5 million. At the end of last season, The Brewers decided that it was unlikely that they would be able to reach a contract agreement with Prince Fielder regarding salary. It was recently announced that Fielder and the Detroit Tigers came to an agreement that pays Fielder $214 million over 9 years.  This averages out to approximately $24 million per year.

Major league teams have two important resources when signing players.  The first resource is money.  If the Brewers had signed Fielder at the $214 million price tag, they would have had little left to sign other players.  The money that is left from not signing Fielder is an opportunity cost. If the Brewer team payroll remained at $85.5 million, Prince’s salary would make up 28% of the entire team payroll.

Second, Major League Baseball allows only 25 spots on a team roster.  If the Brewers had signed Prince to a $214 million contract, the money remaining to hire players would most likely be insufficient to sign experienced players.  It would be difficult to maintain the salaries for players like Ryan Braun, Zach Greinke, Corey Hart, and others with salaries well above $5 million per year. This would leave the Brewers having to fill their roster with minor league players with little or no big league experience.  Therefore, the opportunity cost of signing Prince Fielder would not only be the money unavailable to sign other players, but the cost of having to use less experienced players to fill the roster.

Whether the Brewers made the right decision, can always be argued, but the opportunity costs can be identified and quantified fairly easily.

February 15, 2012 | Categories: Economy, Financial Education | Tags: detroit tigers, fundamental economic concepts, Major League Baseball, Milwaukee Brewers, opportunity costs, Prince Fielder, State Treasurer, wisconsin, Wisconsin State Treasurer | Leave A Comment »