Wednesday, March 14, 2012

Opportunity Cost

In an article I read, the term, "opportunity cost" was used. It sparked my interest. What does that mean?
It is a term from the confusing world of economics, a complex term that really evaluates a simple thing. It involves what is given up in order to follow a certain action. Or, what you could have gained by taking a different path. Opportunity cost evaluates what is given up or gained. used the example of a college education: the salary lost while in school, compensated by the possibly higher salary after the degree is earned. Or, a stock investment that earns a small percentage, compared with the higher percentage you could have earned in a bond, the difference being the opportunity cost.

Opportunity Cost is about choice. If we decide to grow carrots in our garden, rather than strawberries or chrysanthemums, the different result gives us the opportunity cost. A choice is required. Knowing the results would be helpful, but the option we choose will give us either benefit or loss.

Both Investopedia and Wikipedia discussed that opportunity cost goes beyond monetary or material values, which I was glad to see. This applies to anything of value: how we use our time, how we build relationships, how we use our creative energy, our efforts to build memories and establish foundations in our homes and families, all can be calculated with opportunity cost.

For those of you who are algebra fans, there is a formula (on Wikipedia) for calculating good y vs. good x relative to the good forgone. Or something like that. It was over my head, but their example of choosing between parties and a date and mathematically calculating the result was amusing.

Opportunity Cost: what is given up or what is gained. What does all this mean?

  • A choice to spend the time talking with the kids when I would rather be [whatever] is weighed by the benefits to our family relationships
  • A choice to browse through a magazine instead of cleaning the shower or organizing the shelves is evaluated by the loss of order and cleanliness in our home
  • A choice as to how I spend my time in the afternoons will result in good management of the resources I have, or wasted resources (thank you for this idea, Deidra)
  • Being aware of the long term value gained by time spent together, reading aloud, playing games, learning together, just doing stuff together
  • Choosing to eat smart and exercise rather than indulge my sweet tooth and idleness will yield a better opportunity cost, long-range
  • Money I spend on one thing will be money I cannot spend on something else, perhaps something more important
What opportunity cost choices do you think of? We all make choices every day. The results are seen in hindsight, but by thinking ahead and evaluating the value, the opportunity cost, of our choices, perhaps we will be able to make wiser decisions.

1 comment:

  1. I read this earlier today, at lunch. I didn't have time to comment then. But tonight was bible study in my living room. Just four women who've agreed to meet for just one hour once each week. Tonight, there were tears and much sharing of burdens and, in the middle of it all I thought about this post and the choice I was making to miss deadlines and other things and to just be there, on the love seat, saying a prayer. Thanks.