Opportunity Cost

If you could understand and apply one key concept in economics that would most affect your personal and professional decisions, it would be opportunity cost. Opportunity cost is the value of a resource in its next best use. It may be helpful to begin with a universal example.

Time is a valued resource for most people. It is finite for everyone: People have 24 hours a day in which they must allocate work, family, sleep, fun, and other non-fun, non-work activities. Unless you are quite adept at multitasking, once you have decided to do something, you have also decided not to do something else that may have had value to you. Many of our choices are mutually exclusive. If you decide to go to a movie, for example, those 2 hours will not be spent working out at the gym. In addition to the cost of the movie, you will have forgone the benefits of 2 hours of exercise. The true cost of the movie, then, is not just the $6.50 for the price of a matinee movie ticket, but also the exercise at the gym. Although the value of the exercise may be more difficult to quantify than the price of the movie ticket, you must take it into consideration when you decide how to spend your time.

Consider another example that combines business and professional decisions. Suppose you live outside an urban area such New York City, where commuter trains offer an alternative to driving to work. How would you make the decision to take the train or drive? Compare the out-of-pocket costs of driving and riding. Given the costs of car ownership, including depreciation, as well as operation, including gasoline, maintenance, and parking, the train may be less costly. You should also add in the value of your time. If you drive, that requires your undivided attention. If you were on the train, you could devote the time to getting work done, which could benefit your career, or you could spend some time with family and friends. You could also consider sleeping on the train. Alternatively, you might open your laptop and study for an advanced degree through a college or university like the University of Phoenix that makes learning materials available digitally. Many people have done this, and the value of the commute time on the train is the return on their educational investment that they will enjoy through promotions and a higher income. When comparing the out-of-pocket costs of driving and commuting, you need to factor in the value of the time that the commute provides