Opportunity Cost
Written by Anuar Burkitbayev
So you might be able to relate to this scene -- it’s Christmas, you’re sitting on Santa’s lap and he asks you the question, “So my child, what would you like for Christmas?” This seems like the perfect opportunity to ask for that new bike you always wanted, the new phone everyone’s talking about, and the video-game you’ve been so hyped about. The problem is, only one of your wishes would be granted.
This is where the concept of opportunity cost comes into play. Opportunity cost is the cost of the next best alternative forgone. Meaning that by choosing one option, you give up all other options. By choosing the new phone, you give up the opportunity of owning a bike or a new game.
So how do you determine that one best option? In this case, you need to weigh your utility and satisfaction from the product. Would you be more satisfied with the bike, phone, or game? What would grant you the most utility? The bike could cut down your school travel times by half; the phone could let you film higher quality videos so you can gain a larger following and pursue your dream of internet fame; the game could help you unwind after a long day’s work. After careful consideration of these factors, you’ll be able to determine the best choice.
Let’s use a more economics-based example. Say that you’re the owner of a transnational company and you have recently earned a cool profit of $10 million. Your managers say that you can either invest those $10 million into a new location in a new country or into your current factories by upgrading their equipment. Once again, you can only choose one or the other. If you open that new factory, you won’t be able to upgrade your current equipment and vice versa.
In order to determine which would be the better option, we have to assess a wider range of factors. The most important one being the amount of profit that each generates. After careful consideration of each of these factors, you will have to decide which would be the better option and forgo all others.
