What is the Meaning of Opportunity Cost?

The number one issue I’ve always had with the concept of opportunity cost, is that it’s sometimes extremely difficult to figure out what the benefit of any action could possibly be. What if you have two separate career opportunities, things don’t always work out for the best, because of the multitude of problems that could occur along the way. An expense that is unclear or vague is often called an implicit expense, this is something that goes hand in hand with opportunity cost in my opinion.

Take for example, an entrepreneur that works 14 hour days for years and ends up losing all his money, because of factors out of his control. Sounds like my Youtube career, google is a scam. The problem here is, we can never know everything that is going to happen in the future, therefore, we are almost always missing an opportunity somewhere else.

Welcome to opportunity cost…

The principle of opportunity cost arises from the definition of scarcity. The opportunity cost of a decision is what you must give up to make it. It is the worth of that first best chance, to put it another way.

Scarcity has a strong impact on opportunity cost, we have limited options. When it comes to determining how to use their labor and resources, consumers must decide between a variety of options.

Consumers cannot have everything, they must place a value on the choices they make, assuming they choose one option over another, they are saying that the choice they made is far more valuable than the other. A rational decision to make is one that receives the greatest benefit for the lowest cost. One of the most common ideas in economics is the principle of opportunity cost, when you start to think about the value of a choice through the lens of the costs versus the benefits.

There is nothing like a free lunch, though nothing is free, everything has a cost. Inside a context of scarcity, everything has an opportunity cost. Every choice you make will usually include a barter or some kind, even if you choose to take the most expensive option, you could be missing an opportunity somewhere else.

Here are a few other articles on economic topics you might like to have a look at:

Opportunity Cost Example in Real Life

All people have the same amount of time each day to enjoy life, make money, and so on. Whenever we make a choice to take part in one specific activity, we are choosing not to take part in another activity. There is a scarcity of us (we only have one body) and there’s a scarcity of time (we can’t do two different things at the same time), which means that the cost is missing out on taking part in the activity we chose not to do.

Opportunity Cost is about Making Correct Decisions

Think about this: How much does it cost to send your children to school for a year? The actual expenses, such as school fees, textbooks, and stationery items. These expenses should all be added up, and subtracted from the benefits.

Now, what are the benefits of schooling your children at that specific location? Unfortunately, you will not know the benefits for many years if there were any benefits at all.

Here are instances of explicit expenses, or prices for which a monetary payment is required. These expenses, however, are insignificant when contrasted to the worth of the moment spent in the classroom, doing assignments, and so on.

The implicit cost of going to school is at a certain rate, is an opportunity spent, that the person could have gained if he had worked instead of going to university. Costs that don’t need the payment in cash are known as implicit costs. Explicit and implicit costs are valuable concepts in the economic theory of opportunity cost.

Explicit costs are those that must be paid in cash.
Expenses that do not need a monetary transaction are known as implicit costs.

Explicit and implicit expenses are accounted for in the opportunity cost.

Total revenue – opportunity cost equals economic gain.
Total revenue – explicit cost equals profit margin.

The concept of opportunity cost explains why many sportsmen do not complete their higher education. The huge amounts of money they potentially make as a sports star are included in the expense of attending college. K Bryant’s implicit cost will have gone above $10 million if he had resolved to pursue higher education for 4 years following elementary school rather than enrolling with the Lakers.

Since implicit costs are included in opportunity costs, they are greater than explicit costs. Financial earnings, as a result, are less than net income. Because hidden expenses are hard to quantify, bookkeepers do not add them. Although a bookkeeper may not always be aware of which investment opportunities were foregone to use the funds to establish a firm, this does not negate the importance of opportunity costs.
They are used by businesses and individuals to make important decisions.

Conclusion

Whatever remains after a selection is made, the opportunity cost will eventually show whether a good or bad decision was made. Both explicit and implicit costs are included in the opportunity cost, which is a brutal reality check for those who make incorrect decisions frequently. Opportunity costs are not only used to estimate a business’s potential gains or losses, but the losses a person makes throughout their lives.

Good luck out there