Opportunity cost is an economic concept that means that with every choice and opportunity there is an associated cost of opportunities lost. Since economics is the science that studies the allocation of scarce resources, it makes sense. We never have enough money or time, so we are constantly juggling time and money – trade-offs- and that’s how opportunity cost enters the picture. Now we don’t have to be rocket scientists to realise it is important to choose the option with the lowest opportunity cost to maximise returns.
Let me explain it this way. When I was at school, the school regularly showed a film on a Saturday evening. It was a favourite social event and fairly well attended. And I suspect it was more for the girls than the movies – except for Piet Maritz, me.
I like surfing and fishing and being at the beach, as my Facebook Profile says, deep at heart I am a beach bum. So I never asked any girl to go to the movies with me, because I was too scared that I would be surfing and the waves are good and then I would have to leave the water just because I had a date with some girl. And when I did get to the movies, I quickly discovered, the girls did not like to be asked as you walked into the hall. To go to the movies with a girl, I had to run the risk of losing good surfing. The opportunity cost for taking a girl to the movies was way to high. So that I cannot remember ever taking a girl to the school movie during my 5 years in high school! Today I wonder about my priorities and if I have changed at all … (Just calculate the opportunity cost of marriage! Do you know the definition of a wedding ring? A marital tourniquet to stop circulation!))
Anyway, the point is that everything we do carries an opportunity cost. I can buy a new car or another property; I can buy shares or go on vacation; I can buy this property, but then I cannot buy that one; or I can buy this property or two others.
What does it mean? It means that when I consider two alternatives, A and B, and my potential returns on the opportunities, I have to ask: “What am I forfeiting to do this investment?” And what am I loosing, because of that?
So opportunity cost is something different from accounting cost, but a very important concept in determining your course of action.
And, as my own life illustrates, the concept of opportunity cost has a much wider application than just money, economics and finances!
Opportunity Cost and Star Baseball Player
So, did the Management Make the right choice of Players?
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