The simple, yet effective, principle of opportunity cost
How understanding this fairly simple economic principle can have a huge impact on your everyday life.
Every day we face choices. Every day we face opportunities. Some are grand in scope and others are mundane. But what makes each one of these opportunities important is the understanding that each has an attached cost that we must choose to bare.
This cost is not always paid in money. It can be time, memories, skill attainment, and other opportunities. The cost is the alternative we could have chosen in any given choice we made.
If you’ve ever read one of those Goosebumps books that said “if you chose X turn to page 41, if you chose Y turn to page 9” then you will probably grasp this principle pretty easily. If you haven’t read them, then I recommend giving one a try.
But here are a few examples to help you start seeing the opportunity costs you may face in your life:
You have £3 in your hand. You can either buy a meal deal (sandwich, snack and drink) from the supermarket or you can buy a coffee in the café over the road. The £3 cannot be used to buy both. You have two opportunities to choose between.
You have an important work/study deadline tomorrow. Your best friend calls and invites you to go for a quick drink at the pub. You have to choose between doing your work and seeing your friend for a quick drink. The work is very important and could have a long lasting impact on your life and career. The drink with a friend will be fun and provide a distraction from the work you’re not enjoying, but it will have a negative impact on your work. Either way you must choose one and negate the other.
You’ve been working hard and decide you need a weekend away somewhere nice. You can’t decide whether to go skiing in France or for some autumn sun in Portugal. You can’t do both so you have to pick one and not do the other.
It seems simple enough doesn’t it? It’s basically the choices we have to make on a daily basis. Beans on toast for dinner or make a lasagne. One negates the other and leads to alternative outcomes.
But to drive home the point let’s take a closer look at example 1. Let’s say instead of £3 you have £6 in your hand and you say to me “I can buy both the meal deal and the coffee, there is no opportunity cost here!”
Wrong!
Each choice costs £3. You may have the money to buy both but each requires a payment of £3. You must still choose to part with the £3 in order to acquire the choice. Just because you can have both does not mean the opportunity cost is not present. That £3 you spent on the meal deal cannot also be spent on the coffee, you have to reach into your pocket and pull out another £3. The £6 you spent to buy these things cannot be used to buy the book in the bookshop next door to the café.
Similarly you may say that you could go to France and ski, then get a plane to Portugal for some sun but you cannot do both at once and the choice you make of where to go first will alter the opportunities you could have had if the alternative was your first choice.
You see? Each choice we make negates another choice we could also have made.
The useful lesson we gain here is that each of our choices are important and over time they shape our lives. Thinking about what you are willing to give up in order to make a more beneficial gain can help bring about clarity in knowing what you want and where you are heading with your life.
Challenge: Spend a day seeing what opportunities you choose between and take note of how it impacts your thinking about the future. Does it make you stop and think before an action you would have otherwise taken for granted?
Time plays a huge role in this concept so keep an eye out for a future post on the principle of time preference and how that relates to opportunity cost!
Another opportunity cost, reading this post or doing my work! This is a good introduction into opportunity costs!