Do You Really Know the Cost of the Last Decision You Made?

In our modern world, there are endless alternatives. Therefore, it’s difficult to choose an opportunity that is right for you.

Have you ever found yourself wondering whether you should quit or stay in your job, accept an offer or give it up for another, or purchase or survive without? Do you know the cost or opportunity you can gain when you choose one from another other?

There is a simple and practical method that solves this problem. It's about finding out the opportunity cost.

When you understand opportunity cost, you have the power to measure every alternative with precision and make the right decisions.

What is Opportunity Cost?

In the field of economics, opportunity cost is the value that you have to forgo when you choose an option over another good option. It is a concept you can apply in many situations, from deciding which projects you should pursue to spending time with loved ones instead of working overtime. Most people overlook opportunity costs because the benefits are usually hidden from view.

One of the key principles of economics is there is no such thing as free lunch or something for nothing. The resources that you have – time, autonomy, and money are scarce. Choosing one will require you to forego lots of amazing opportunities.

Every alternative has a unique set of pros and cons. The simplest examples involve your daily purchases. Since you cannot buy everything you need, you tend to compare products, the amount of money you’ll pay, and the number of goods that you’ll get.

When economists look at opportunity cost, they consider two types:

• Explicit – These are costs that are incurred when you take a specific course of action. These costs are usually associated with a decision. And they include wages, stock purchases, utilities, and rent to name a few. Any amount that is required to move due to a decision falls under this category.
• Implicit – These are costs that you may or may not incur by forgoing a course of action. They are difficult to identify because they are indirect. They represent benefits or income that you could have generated had you gone for the alternative choice.

Opportunity cost matters not only in economics but also in real life. It is what you are giving up to get something.

For example, Netflix doesn't cost you $15.49, it actually costs your time; social media isn't free, it costs your focus; and a fast-food combo meal doesn't just cost you $7.99, it costs your health. Or for instance, working over time doesn't just cost your hours, but your fulfilling family relationship.

How to Calculate Opportunity Cost (Step-by-Step)

As we said earlier, opportunity cost is the value of the forgone alternative. The value can be measured in time, money, and satisfaction. Therefore, there is a mathematical way to think of opportunity costs.

A simple way to calculate opportunity cost is to find the ratio of what you are giving up to what you are gaining. When you think of opportunity cost in this manner, everything becomes easy.

Opportunity Cost = What You Give Up / What You Gain

In the world of business, the concept of opportunity cost applies in various processes. Entrepreneurs can think of opportunity cost in this manner:

For the majority of people, it makes sense to think of opportunity cost from the aspect of sacrificing and gaining. You should use opportunity cost when making decisions, especially the important ones.

Using opportunity cost calculations will allow you to determine what is valuable and identify the returns of the forgone alternative. As an entrepreneur, you should use opportunity costs to make decisions that will positively impact your business and increase returns.

Learn more about opportunity cost here: What Is Opportunity Cost And How to Calculate It?

Wrapping It Up

As you have seen, every action you’ll take has an opportunity cost. You should always compare every economic opportunity and choose the option with minimal costs.

Opportunities can have similar costs due to emotional or personal reasons. In such instances, having a clear attitude and using the tips that we’ve covered here will help you make the right decisions and boost your productivity.

Leon Ho is the Founder and CEO of Lifehack – a productivity blog he started in 2005. He was listed as Business Week’s #4 “Top 24 Young Asian Entrepreneurs” and has grown Lifehack into one of the most read self-improvement websites in the world – with over 12 million monthly readers. You can check out his book The Full Life Essential Guide, and take a look at his self-improvement mastercourses here or join one of his free classes here.