Every single day, people face situations in which a choice should be made. Decisions can be as simple as what to eat for breakfast, which does not change anyone’s life to a great extent, yet there are many instances in which a certain action has a huge importance with large consequences on an individual’s life or even on other people’s lives, so that a more serious approach is required. That’s some real-life examples of opportunity cost.
Usually, if not always, we have to choose just one certain way, the first option, or an alternative. The simplest examples can be found among your everyday purchases. Since you cannot buy all the products offered, before a purchase you tend to compare products, their prices, quality, and other features that are of importance to you. This happens because we live in a world of scarcity, where resources like money, time, the number of goods supplied, etc. are limited. Since we cannot have everything in unlimited quantity, such conditions force people to choose from among many opportunities, and this is where the opportunity cost plays an important role.
The Cost of Mundane Decisions
Opportunity cost in economics is what you have to give up to get something. Choosing to order Chinese food, you lose the opportunity to eat Mexican or Italian food. Choosing to buy a product of one brand, you lose the opportunity to try all the other alternatives offered.
Another popular dilemma, which seems to bother many students, is whether to obtain a higher education or go to work. At first glance, the total cost of higher education is the tuition you pay for studies. However, it is surprising how many opportunity costs higher education entails. Just imagine that besides paying tuition, you would also spend a certain number of years studying, with costs, depending on the country and the system of education, to cover accommodation, everyday transport to the university and back, course materials, student loans, etc. But most importantly, and which most people tend to ignore, is the amount of money you would earn working instead of studying during all of these years.
Calculated all together, the cost in total is dramatic, which might make you think that it is more rational to work instead of studying. However, if you continue an analysis of the opportunity cost, you will quickly notice that the difference between the wages of the people with a higher education and those without is great. This means that even though, during the years of study, you will be worse off than those who decide to work, in the long term you will be better off, having a higher standard of living in the future. Analysing the situation with the help of the concept of opportunity cost, therefore, gives you the chance to come to the best possible decision with the least effort.
What Happens When You Say “Yes”
Generally speaking, everything in life is about opportunity cost, as every time you decide to say “yes” to an opportunity, you immediately lose all the alternatives that you could choose instead. This is how we create priorities and values that we usually follow in making a decision.
The tricky part of opportunity cost, however, is the fact it is not only about money loss or gain. On the contrary, we make sacrifices not only with the things that we can buy with money but also for those items which have no physical price. These are so-called unseen or hidden costs that an opportunity can have. For example, the way a person spends leisure time is a completely individual decision, which does not seemingly include any costs. Yet, every decision directly or indirectly has a cost.
In the case of your free time, you could, for instance, decide to go out with your friends, which would give you positive emotions, great experiences, and the pleasure of communication. It seems that this does not cost you anything. However, from the perspective of the opportunity cost and the previously mentioned unseen costs, such a decision can be quite pricey. Just assume that instead of going out, you could spend extra time preparing for your test, which should result in a better grade and higher GPA, giving you better opportunities to go to a good university. Or, alternatively, you could learn a new skill, obtaining better chances on the labor market. Hence, even though you do not lose any money, the opportunity cost is still considerable.
But It Is Also About Experiences
Based on all of these, you can see that every action has its opportunity cost, which sometimes might even be unseen. It therefore might be unclear how to make a rational choice, considering all the opportunities that are available. Coming back to economics, the answer is simple: one should compare all the opportunities and simply choose the option with the least costs. Such an approach is definitely the dominant one in making decisions, especially for those who encounter a lot of doubt. However, in some situations, it might not be that straightforward. Sometimes, opportunities might have similar costs or, because of our emotions and other personal reasons, some opportunities might outweigh the others. In such cases, of course, the lack of a clear and objective attitude can put you at risk of being biased, resulting in an irrational choice.
What differentiates the real-life case from the classical economics one is experience. The chance to see and learn new things in life may cost you lack of sleep, the wrong choice of a life path – with wasted years and the need to start everything from zero. But without trying, you will never really know what is the right and rational choice is for you. Therefore, the opportunity cost is not as strict or obvious as it may seem in theory, because eventually, there is always one thing that you gain – experience. However, since positive experiences have a better effect on a person’s life, it is safer not to leave the decision making process to chance but to take control over it, measuring the costs of the opportunities that we face.
Photos: Shutterstock / Photomontage: Martina Advaney