Opportunity cost is the value of the second best choice, which an individual gives up, in order to make a choice. Because we have to make choices each day and are only given “x” amount of time, we are constantly giving up other choices and dealing with opportunity costs. Some examples below help to clarify different types of opportunity costs.
For example, an individual has $25 to either purchase groceries or new clothes. The individual weighs the choices against each other and decides that it’s more important to eat for the week and forgo the new pair of jeans. The opportunity cost of the groceries is the new clothes. If the consumer swaps the choice and chooses the jeans, then, the groceries are the opportunity cost. If an individual goes to college, the opportunity cost is the money, which could have been earned at a job. However, if an individual chooses to work a job, rather than get an education, the opportunity cost is much greater than the four years of college. Rather, the opportunity cost is the difference in incomes (College graduates earn much higher wages, typically by at least 30%, than those who do not go to college.) and the knowledge lost from not attending school.
Opportunity costs are not just confined to monetary values. Lost time, happiness, output forgone, knowledge (as stated above), and any other benefit that provides some sort of utility / purpose / value, can also be categorized as an opportunity cost.
Some choices contain multiple opportunity costs. For example, if an individual has the choice to help someone out or go with friends to earn money at a job function, the individual may decide to help someone out because he feels it is the right thing to do. As a result of that choice, he loses personal time, pleasure with his friends, and monetary earnings from the job function. All of these are opportunity costs.
There is a practical application here. Opportunity costs effect how individuals make decisions each day. Wise individuals will weigh out both options and choose the choice, which appears to have the least opportunity costs. Of course, no one knows what results will happen in either choice; thus, why it is necessary to carefully peruse and investigate each decision.
Because opportunity cost measures the advantages and disadvantages of choices in relative prices (the relativity of prices to each other), this can easily be tracked numerically to help businesses. For example, if a standard can of formula costs $16.00 and the price of a gallon of milk costs $2, than the opportunity cost of purchasing the can of formula is 8 gallons of milk. Sometimes comparing choices in non-monetary values to monetary values helps out to see different aspects of one’s choices. Companies often use this to help them better assess situations.
Opportunity cost is definitely something consumers and businesses want to be aware of. It gives them direction and purpose in their choices and gives them a criteria or rubric to base choices on. Balances and weighing out all opportunity costs will help consumers to improve their decisions and help them to move in the direction they desire to go.