Economic Opportunity Cost

In a world with limited choices for individuals, societies and their governments, economic opportunity cost is a fundamental concept in the study of economics, which refers to the value of the next best buying choice when a purchase decision is made. For individual consumers, economic opportunity cost presents an ongoing tug-of-war between immediate gratification verses longterm wellbeing, for instance, when a consumer foregoes their three caffe lattes each week at a cost of $4.49 each or $54.00 per month, instead, banking the money at three percent interest, which in turn yields $7,619 after ten years of disciplined consumption tradeoff.

Individuals & Nations Alike

Societies and their governments make similar opportunity cost calculations—frequently driven by political and societal aspirations or dilemmas, such as spending big money for a return trip to the moon, verses spending on aging infrastructure, homelessness, healthcare, education and medical research. Opportunity cost also extends beyond monetary considerations to encompass intangibles like an individual’s time, skill and expertise, such as pursuing an advanced degree instead of entering the workforce straight out of high school or college, which then beckons a tradeoff decision between a financial investment in higher education verses foregone potential income during the additional years of schooling.

Cost-Benefit Analysis

Even in the corporate world, opportunity cost—sometimes called cost-benefit analysis—plays a key role in investment decisions and the ultimate longterm strength of the business, for when a company decides to allocate capital into a given project or venture, the decision makers must also calculate the lost potential returns from other avenues of resource allocation. Considered a foundational concept that underpins most facets of individual, societal and business life, a comprehensive understanding of economic opportunity cost creates a more informed and efficient consumer, society or business, leading to financial well-being and resource optimization, making economic opportunity cost, a nagging and constant battle for human minds everywhere.