Opportunity Cost

The concept of opportunity cost is probably not so well appreciated even though it is extremely simple. But the manner by which we tell the story of opportunity cost might have to change in order for us to appreciate this powerful concept.

We traditionally understand opportunity cost to be the sacrifice of the next best alternative in whatever choices made. The best example is the way you spend your time; when you choose to spend your time going through facebook or your instagram feed, the opportunity cost is the work you could have done, or the presence you could give to your family. Likewise, money spent on consumption cannot be saved.

Time and money is scarce. But when we tell our story about opportunity cost, we tend to focus on the cost in terms of what is scarce. Sure, it is the limited time and money (as a proxy for resources one has) that results in the existence of opportunity costs, but what we are truly sacrificing is the “opportunity”.

So it is important that we begin to think about the cost of one thing or another not so much in the form of time and money but what that time or money would be used otherwise. Because without the “opportunity”, the cost has very little meaning.