Everyone Should Learn Opportunity Cost
“If you remember one thing from this introductory class, I want you to remember opportunity cost.”
These were the famous words from my Intro to Microeconomics professor. True to his request, it’s about the only thing I remember from his intro to micro class. Well that, and his love of Cristiano Ronaldo.
I didn’t understand why he cared so much then, but as I’ve become older the value of this concept becomes more clear.
For those unfamiliar, the concept of opportunity cost is that in order to do any one thing, there is a cost. Specifically, that cost, in addition to any required materials to do said action, is the benefit from what you’re choosing not to do.
Opportunity cost as a concept is deceptively simple. Although it’s often introduced in the context of comparing two or more business opportunities, it can extend to most decisions with cost tied to them.
It’s Universal
I don’t mean in a transcendental way. Instead, I want to emphasize that it can be applied to most decisions.
One common, nonbusiness example, opportunity cost extends to is the decision to attend university.
In my case, the cost of attending university was approximately $30,000 in loans and 4 years of my life. In addition, I also sacrifice any income I would have made during this 4 year period and any alternative training I would have received.
Another example of opportunity cost at work is your choice of dinner. If you decide to have microwave chicken nuggets for dinner then the cost is the chicken nuggets and approximately 5 minutes of preparation.
Your chicken nugget dinner may give you a moment of happiness, but eventually, you’ll get crushing guilt over how unhealthy your dinner was and how lazy you decided to be that evening. In this heartbreaking realization, we understand the opportunity cost.
Although you saved on time, you sacrificed the nutrition you would have gotten from a more balanced dinner and the pride from actually cooking a filling meal.
I should technically say that it’s harder to apply this principle to intangibles like feelings since they don’t have an objective value; however, since your emotions apply to you and you alone I feel they’re a valid measure because you can say consistently how much you value pride over guilt and so forth.
It’s a Great Tool for Decision Making
As I’ve alluded to through this article, opportunity cost can be a great tool for decision making. It allows you to more clearly and concretely weight the pros and cons of a given choice.
I don’t recommend using it for the chicken nugget example though. The difference in cost would be relatively small. A lack of significant difference in cost would suggest the analysis may not be warranted or worthwhile.
I would suggest that high school seniors use this for deciding their next step. Especially as tuitions rise, the value of a degree is called into question, and the future appears more uncertain as the economic norms shift.
I would argue a rational analysis of what you sacrifice by choosing various “post high school” options is responsible and needed.
Closing Thoughts
Opportunity cost is a powerful tool to analyze decisions. Of course, context matters for decisions based on opportunity cost. Deciding what you value is the hardest, but most important, part of this analysis.
You need to understand what you value to use opportunity cost to its full potential. Without the framework of personal value, opportunity cost cannot give you useful signposts. At best, it’ll tell you what society would find most agreeable. At worst, the tool becomes a hindrance and misleading.
