Opportunity Cost and Decision Making

In everyday life people are continuously forced to make decisions and for every decision made something is being given up. For instance, by spending a dollar on Coke you can’t spend the same dollar on buying a different type of drink – as a result of spending your dollar on the coke you are giving up the satisfaction you could have gotten from the purchase of a different drink. Unfortunately we all have to face more important decisions than what to drink during recess and usually the bigger the decision, the bigger the alternative that is given up. To help you get the best bang for your buck we have to look at one of the most fundamental concepts of economics, opportunity cost.

Opportunity cost is defined as "The cost of a decision expressed in terms of the next-best alternative foregone." When it comes to making everyday choices, we can use the concept of opportunity cost to evaluate the benefits that are being given up or sacrificed whenever a particular choice is made.

The opportunity cost of a choice is what Economists call a Real Cost instead of a monetary cost or price. For example, the price of a hot dog may be $2, but the opportunity cost of the hot dog is the satisfaction forgone by buying the hot dog instead of the next most desirable good (a club sandwich, or a packet of potato chips and a coke). The Real Cost of a hot dog would really be a measure of the sacrifice made in giving up the $2, whereas its monetary cost would simply be $2, the price of the hot dog.

Of course in many cases the value of the choices we make can be measured in dollars and cents but is this always possible?

Let's take a look at this example, "On a Friday afternoon, Bob decided to spend an hour spacing out in front of the TV." If Bob had chosen to spend that same hour of spare time learning how to tie his own shoelace, he might have learned an important lifelong skill – clearly the opportunity cost of Bob spacing out is the ability to tie his own shoes, is the cost of Bob’s choice something you can really put a price on?

We can’t put a monetary cost spacing out at home for an hour instead of learning to tie your shoelace – in Bob’s case the only cost we have to look at is opportunity cost of spacing out. In order to make the best possible decisions in life, we must not ignore the fact that there is an opportunity cost for every choice even if there isn't always a monetary cost for the same choice.

By looking at the cost of one choice in terms of the foregone benefits of another, the costs and benefits of the choices can be easily compared. For these reason primarily it is necessary for people to take opportunity cost into consideration.

The next time you are making a decision try asking yourself a few questions, Is there a monetary cost of what I am doing? By making decision, what are the benefits I may be missing out on? An ice lemon tea costs a dollar, but a green tea costs 90 cents. If you pick the green tea you can expect it to taste disgusting, is saving 10 cents really worth it?