What is opportunity cost?
Well, the opportunity cost is potential missed opportunities foregone by choosing one thing over the others. Don’t mind the jargon, let me simplify it for you. To simply put it, if you decide to sleep during the day, your opportunity cost would be other things you could have done instead of sleeping.
You are always letting go of something by choosing to do/buy one. Another example, if you are buying 50 boxes of pizza, you are surely losing the opportunity of buying other foods or items with that money. That’s the opportunity cost of buying 50 boxes of pizza.
Why is opportunity cost important?
See, the opportunity cost is one of the most important things to consider while making an important decision. It is a staple topic in economics. Firms, companies, organizations, political parties even individuals need to consider opportunity cost.
What happens if I overlook the opportunity cost?
Suppose you working as a manager for a company. Your salary is 500$ per month. It’s quite a handsome salary. But you calculated that your business idea can generate a thousand dollars per month for you from the very start, even excluding all the costs of running it. So, if you think closely, you are actually losing 500$ per month by working as a manager. Thus, your opportunity cost of working as a manager is 500$!
Let’s consider another scenario, you’re the leader of the opposition party in your area. The government decided to invest its surplus in housing projects. But as the opposition team leader, you’ve shown them the opportunity cost of investing in housing. You’ve shown that, if the government spends that money in your area and builds some schools, hospitals, and railways; the investment generates much more value and also makes it more future-proof. In that way, you can develop your area and secure your vote bank too.
Now you can see that the opportunity cost is quite handy. Not only for personal decision making, but also in a much larger field; like national politics.
How to measure my work’s opportunity cost?
Write down what you are currently working in. Then write down what you could have been doing instead. After that, compare the monetary value of your current work and the best alternative. The difference between those two is the opportunity cost of your current work opportunity cost.
Can my opportunity cost can be zero?
Yes. If you were unemployed and had nothing to do which could bring you some monetary value, and you started a venture which brought you some monetary value, the opportunity cost of opening your venture is zero. Because, if you stayed unemployed, you could not bring any money home anyway. For example, in rural areas, some people have only two options. Either work in the field or stay unemployed. So, the opportunity cost of working in the field is zero. (Now you can realize why the government emphasizes making people more skilled. If skillful people increase, they have more options in hand. If not, they have very limited economical choices, which can be a bad thing for the overall economy of a country).
Should I always worry about the opportunity cost though?
In my opinion, No. You should not be obsessed about opportunity cost in every step of your life. Sometimes you need to listen to your instinct instead. Sometimes you need to let go of some monetary value to make yourself happier. For example, you are working as an accountant in an accounting firm. Your salary is 500$ per month. But if you do some freelancing instead, you could make 450$ a month. It seems like a rational decision to continue working as an employee until you look closely. If you work as a freelancer, you can work from your home, you can save your transportation cost and also the time spent in it. You can also work in your self-earned freedom, without any supervision of your boss. You can gather more experience and hopefully, you can earn even more in the future. So, maybe continuing as an employee might not be a good decision after all.
As you can see, the opportunity cost is something to bear in mind, undoubtedly. But depending on it too much is not something that you want to do. The more balanced the measurement of it is, the more efficient it will get. If we can utilize it properly, it can be a lifesaver!
All-Marufi Rahaman Sajon, Intern, YSSE