The modern world presents many options and alternatives, making it difficult to choose the right opportunity. A dilemma can arise in the form of whether you should quit your primary job to focus on your side hustle or not.
Other everyday decisions that can present us with such a dilemma include reading a book or watching something on Netflix.
You pay an opportunity cost when you choose one alternative and let go of another choice. Sometimes, making the right decision is all about understanding the opportunity cost.
What is the opportunity cost?
In simple terms, opportunity cost is the cost or value you let go of when choosing one option over another. Opportunity cost is essential not only to managing economics but also, day to day life decisions too. For instance, should you invest in Lottery Sambad instead of Dhankesari; or work overtime instead of spending time with your loved ones? Unfortunately, it is common for people to overlook opportunity cost because it is often hidden.
The saying that there is no free lunch is highly valid for the opportunity cost. In addition, all options, no matter how good they are, have their own sets of pros and cons. You can see yourself applying opportunity cost when you decide to purchase one item instead of another because of the cost of the products.
To improve your decision-making skills, you need to become critical of the opportunity cost. It is because the actual cost you often pay when making a decision is the opportunity cost.
The importance of opportunity cost
In economics, opportunity cost is of two types: explicit and implicit. The explicit opportunity cost is the direct cost you bear for an action. On the other hand, the implicit opportunity cost is the cost you may or may not bear by pursuing an action. It is often indirect and hence, is difficult to identify. The implicit opportunity cost represents the benefits you could have reaped if you had chosen the alternative option.
As discussed above, opportunity cost matters in financial and real-life situations. For instance, many people struggle whether to continue their job or start a new business. Both of them have their own set of advantages. For example, if you start a business and it is successful, you can become a millionaire or billionaire. On the other hand, staying in your current job can help you polish your existing skills and live a stable life.
Similarly, a business can fail, and you can also be fired from your job. In such a situation, weighing the sets of pros and cons is crucial and will help you figure out the opportunity cost. However, when calculating opportunity cost, it is essential to remember that it only sometimes reveals itself in monetary value.
Stay critical of opportunity cost
In life, you cannot have everything. Even though the demands can be unlimited, the supply is always limited. Therefore, staying critical of opportunity cost is a must to gain the best out of your limited resources.
When measuring opportunity cost, you can consider aspects like money, satisfaction and time. A simple way of calculating the opportunity cost is simply by finding the ratio of all three. When calculating the opportunity cost, analyze the ratio between what you are giving up and what you are gaining. With this simple formula, you can identify what is valuable and what is not.
Here is an example to help you understand the opportunity cost better. Although, supposedly, the Netflix subscription costs you $15, are you actually just paying $15? The price here is also your time. The same logic holds for social media, which are often marketed as free platforms. However, it costs you your time, productive hours and concentration power. However, these opportunity costs, which are generally hidden, are only sometimes considered when deciding something.
Staying mindful of the opportunity cost is vital to ensure you get the best out of everything. Every action that you take in your life has an opportunity cost associated with it. The real question comes in the form of what you are willing to let go of to achieve something. The best way is often to calculate the ratio of both and find a balance between them.
