How Opportunity Cost Is Important To Us ? | Opportunity Cost In Our Daily Life
The true cost of something is what you’ll have to give up to get. One of the key principles of economics is there is no such thing as free lunch or something for nothing. The resources that you have – time, autonomy, and money are scarce. Choosing one will require you to forego lots of amazing opportunities. So here comes the key concept of Opportunity Cost. In this article delight you get to know about How is opportunity cost defined in everyday life and How Opportunity Cost Is Important To Us.
What is Opportunity Cost ?
Opportunity cost is the estimated return of investments you don’t make compared to the expected return of investments you do make. In other words, Opportunity cost is the delta between what you’re currently doing and what you could be doing instead.
Let us assume you have 500 INR and you want to pass some time. You have three options to spend your money on:
1) A book worth 500 INR
2)A movie to multiplex worth 500 INR
3)Shopping worth 500 INR
Out of the above mentioned options, let us say that the following is your preference order:
Shopping>movie>book
It means you prefer shopping the most and the book the least. Opportunity cost is the cost of the next best option. The cost may not always be in terms of money but in terms of the utility or benefits the person derives from the choice.
Opportunity cost is a useful and proven method for considering different business decisions before they happen. While no one has perfect knowledge of what will happen in the future, weighing the expected results of a variety of options and considering both the positives and negatives is a responsible approach to decision-making.
Types of Opportunity Costs
Whether you realize it or not, you deal with both implicit cost and explicit cost while making any decision. Broadly two types of opportunity costs are :
- Explicit – These are costs that are incurred when you take a specific course of action. Explicit costs are as the name suggests direct costs that can be identified clearly. These costs are usually directly associated with a decision. Any amount or value that is required to move or sacrifice due to a decision made falls under this category. For example in above case of spending 500 INR the explicit cost is the entertainment of movie that you will instantly miss.
- Implicit – These are costs that you may or may not incur by forgoing a course of action. They are difficult to identify because they are indirect. They represent benefits or values that you could have generated had you gone for the alternative choice. In the above case of 500 INR example, the message from the movie might be the implicit cost that could have motivated or guided you whole life.
How Opportunity Cost Is Important To Us ?
If the opportunity I lost enabled me to gain something else that you really wanted, you feel accomplished and your life improves. On the other hand if you failed to take advantage of an opportunity in order to hold onto something that wasn’t really that important to you, then it’s a complete loss and later you may get depressed. Opportunity cost is not an absolute value because every time we make a choice we pass up on another different opportunity.
Every alternative has a unique set of pros and cons. To boost your productivity and efficiency in decision making, you have to have priorities. Every time you choose something, you forgo other alternatives together with their benefits. So, understanding opportunity cost helps an individual or team to make better decision and prioritizing their wants. It also helps allocate scarce resources and make judicious use of them.
Further studies : https://www.stlouisfed.org
Final Takeaway
Opportunity cost gets inextricably linked with the notion that nearly every decision requires a trade-off. Opportunity cost is a very important concept that doesn’t just have its application in economics; you can apply it to all aspects of your daily life. Whether you’re cooking, eating, playing soccer, going to the movies, or hitting the gym, so long as you’re breathing, evaluating the choices you’re presented with is an inevitability, whether conscious of it or not. In the long view, understanding opportunity cost is an important part of making smart decisions.
Read also : The Foot In The Door Technique | Psychology of Compliance ( https://thebrightdelights.com/the-foot-in-the-door-technique-psychology-of-compliance/ )