The Value of Opportunity Cost

Community Comments

By Kelly Brothers

I took Econ 101 in the fall of 1983. I don't remember much from the class, other than the guy who sat next to me; an obnoxious fellow from Dallas who wore pink Izods shirts with the collars turned up. In terms of class material, I remember even less, with the exception of one theory which means more to me today than it did 25 years ago.

Opportunity Cost: the cost of the opportunity forgone. If you decide to build a store on some land, the opportunity cost is the cost of not building something else. If you buy a new boat for $20,000, the opportunity cost could be $100,000 at the time of retirement (assuming you took that money and invested it wisely over decades). If you're the Kings and you sign a player to a $100 million contract, the opportunity cost could be the performance of the multiple other players who could have been signed with that money.

Notice I use the words "could be." That's because the true opportunity cost may not be known for years. In many cases, we can only make a guess at the true cost of a forgone alternative.

The idea of opportunity cost has macro implications as well. If we, as a city, decide to spend millions to build an arena or a museum or better levees; what is the opportunity cost? If a president spends billions on a social program or a war or the space program: what is the opportunity cost?

By thinking this way, it forces you to realize that we have a finite collection of resources. My favorite application of the idea of opportunity cost is strictly personal. If I agree to attend an event in the evening, what is the opportunity cost? Is it time in the pool with my kids? Is it the fact that I will be tired the next day, less productive and maybe even a little cranky?

In my opinion, the application of "opportunity cost thinking" works even better when you evaluate your time and energy commitments. How much time and energy are you allotting and why? What are the opportunity costs of those decisions? When I work long and hard on a project, someone else pays the price. We all have so many forces tugging on us: kids, parents, jobs, commitments, domestic duties. When you are asked to commit time or energy, consider the opportunity cost.

By the way, the opportunity cost of being that guy wearing a pink Izod with the collar turned up...is being ruefully remembered 25 years later!

• Share
  • Digg This
  • del.icio.us
  • Newsvine
  • Facebook
  • Reddit
  • Furl It
  • !Y My Web
  • Google
• Email
• Print

Recommend This

Community Comments