What is the opportunity cost?
A lot of the time of our day is dedicated to making decisions . Moreover, we can say that making decisions in a rational way is what differentiates us from human beings, and therefore, the path we decide to take in our lives depends on the set of decisions that we adopt along it. The opportunity cost, as we will see, is closely related to the decision making, we show you in this article.
What is the opportunity cost?
The cost or opportunity cost, is the way we have to name what we renounce when we decide to make a decision. That is, it really is what costs us something to make a decision, hence the name.
Thanks to this cost, we can assess the different options that are presented to us, in such a way that it is easy for us to know what we really want to choose.
This cost is not only in the form of money, but also for example, the opportunity cost of what we decided to use our time, if a free afternoon we decided to go to the movies or watch a movie at home.
Can the opportunity cost always be measured?
This cost can not always be measured monetarily, let's give some examples:
- We meet at a bar with some friends and we do not know whether to ask for a coffee or not, since we do not have much money. In this case, it is a measurable cost, since we know how much coffee costs us, and how else we could invest that money.
- We are 16 years old and we have finished compulsory education. We are faced with two circumstances, continue studying or keep working. If we choose to continue studying, our opportunity cost would be the money we could earn working, and if we decide to work, our opportunity cost would be the highest salary we could have for adults thanks to our studies. Therefore, although we could make an approximate idea, the opportunity cost of this decision can not be measured .
Actually, we can deduce that all our decisions have an opportunity cost either in time or money.
The opportunity cost in the economy
The opportunity cost is a constant discussion in the economy and in business, when making decisions to be able to choose the most profitable decision, that is to say, the one by which we will obtain a greater benefit with the minimum possible resources.
We will have to take into account the large number of options that are presented to us to decide, preparing a market study in this regard. For example, imagine that we have € 100, 000 of benefits last year in our company. Some of the possible decisions would be:
- Invest in fixed income and obtain an assured return.
- Invest in equities and obtain a variable yield.
- Hire more labor to produce our products.
- Buy more machinery or make improvements in this, to produce more.
- Invest in advertising, to obtain higher sales.
- Dedicate them to the research and development of new products.
How we see, there are many possibilities that we have, therefore, we should conduct comprehensive studies of each of them to give the most profitable use to our money.
