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What is the opportunity cost?

January 6, 2020

A good part of our days’ time is spent making decisions. Moreover, we can say that making decisions in a rational way is what differentiates us from human beings, and therefore, the path we decide to take in our lives depends on the set of decisions that we are adopting throughout this. The opportunity cost, as we will see, is closely related to decision making, we show you in this article.

What does the opportunity cost?

The cost or opportunity cost is the way we have to name what we give up when we decide to make a decision. That is, it really costs us something when making a decision, hence the name.

Thanks to this cost, we can assess the different options that are presented to us, so that it is easy for us to know what we really want to choose.

This cost is not only in the form of money, but also, for example, the opportunity cost of what we decide to spend our time on if one free afternoon we decide to go to the cinema or watch a movie at home.

Can you always measure the opportunity cost?

This cost cannot always be measured in a monetary way, let’s give some examples:

  • We are in a bar with some friends and we do not know whether to ask for coffee or not since we do not bring much money. In this case, it is a measurable cost, since we know how much coffee costs us, and in what else we could invest that money.
  • We are 16 years old and we have finished compulsory education. We are faced with two circumstances, continue studying or continue working. If we choose to continue studying, our opportunity cost would be the money we could earn by working, and if we decided to work, our opportunity cost would be the highest salary we could have as adults thanks to our studies. Therefore, although we could get an approximate idea, the opportunity cost of this decision cannot be measured.

Actually, we can deduce that all our decision

The opportunity cost in the economy

The opportunity cost is a constant discussion in the economy and in business when making decisions to be able to choose the most profitable decision, that is, the one for which we will obtain a greater benefit with the minimum possible resources.

We will have to take into account the large number of options that are presented to us when deciding, developing a market study in this regard. For example, let’s imagine that we have € 100,000 of benefits last year in our company. Some of the possible decisions would be:

  • Invest them in fixed income and obtain a guaranteed return.
  • Invest them in equities and obtain a variable return.
  • Hire more labor to produce our products.
  • Buy more machinery or make improvements to it, to produce more.
  • Invest them in advertising, to obtain greater sales.
  • Dedicate them to research and development of new products.

As we see, there are a few possibilities that we have, therefore, we should carry out exhaustive studies of each of them to make the most profitable use of our money.