Opportunity Cost

Celeste Leuschel- Honorbound

It is a hot day, and you want to eat or drink something cold to cool you off; you see a vendor selling soda, and a vendor selling ice cream. You decide to purchase some ice cream, and do not get a soda as a result. If you were to get a soda, you would not get ice cream as a result. This concept is called “opportunity cost.” Opportunity cost, “the cost of an alternative that must be forgone in order to pursue a certain action,”1 applies to every decision we make, whether we take it into consideration or not.

Unless a significant financial decision is being made, many do not take opportunity cost into consideration when analyzing the financial benefits of a choice. Choosing between ice cream and soda is, in the long run, unimportant. When discussing finances, opportunity cost comes into play when thinking of both short term and long term benefits; after working three hours making nine dollars/hour, one can spend the twenty seven dollars earned on some clothing, or the money can be saved in a bank account. The opportunity cost of saving the money is not having a new article of clothing, but the outcome of saving the money often is more positive than immediately spending it. Opportunity cost is typically determined by a set of two options. If someone decides to choose between soda and ice cream, options such as smoothies or frozen yogurt will have much lower opportunity costs. Also, opportunity cost does not just refer to money; it also refers to time. If a student goes to college and pays five thousand dollars in tuition each year for four years, and the government provides a subsidy for five thousand dollars out of a ten thousand dollar tuition, one would think a student is saving twenty thousand dollars. However, the student could have spent his four years at college working, which caused him to lose four years of income, but with his degree he can manage to make more than the money he “lost” during his college years.1 Therefore, with every choice a person makes, there is an opportunity cost. Opportunity cost also relates to business decisions that impact spending money. A business should consider the opportunity cost relating to spending money on producing products for sale to the public as opposed to investing the money that would have been spent on production to allow the business at a future time to spend money on the production of products. Opportunity cost therefore can relate to the timing of spending as much as it does the actual spending of money.2 Opportunity cost relates to more than just spending money or using time.

Most of the time, we do not take opportunity cost into consideration when we doing something simple, such as going shopping with friends. Perhaps you leave your shopping trip with new articles of clothing and have spent all of your money. Your group of friends could have been doing something that does not involve spending money such as going to a free art show, which could take a fraction of the time spent trying on clothes. Opportunity cost takes in money and time, and most people think of opportunity cost as only involving money.

 

Works Cited
“Opportunity Cost Definition | Investopedia.” Investopedia. N.p., 24 Nov. 2003. Web. 15 June 2016.
“The Role Of Opportunity Cost In Financial Decision Making | Investopedia.” Investopedia. N.p., 29 July 2012. Web. 15 June 2016.gx8
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