Opportunity Cost

Opportunity Cost? What even is that? Well, in order to understand this topic, we need to know what is economics first. Economics is...trade. The root of all economics is trade and the root of all trade is money. It is basically the study of the production, distribution and consumption of services. Almost everything we do links to economics, even though we might not know it. Even buying a small bag of chips is helping the economy grow. 

Now into our main question...what is opportunity cost? In simple terms, an opportunity cost is the value a person has given up in order to get another item. A simple scenario might consist of you waiting in a bake-sale line in order to get free cookies. The opportunity cost is the time you could’ve used doing something more productive, such as maybe going for a walk or doing your homework. Instead you're waiting in line for the cookies, which aren’t really free at the end of the day.

Let's make up another scenario. There were two famous companies. Lets call them company A and company B. Company A specialises in making cloth and Company B specialises in making jewellery. They are both very good at their speciality. Now...let's twist the scenario. Suppose Company A is good at making cloth and making jewellery and decides to stop buying from Company B as they could just make it themselves. The opportunity cost is the time they gave up making cloth, which is now spent on making jewellery. The best solution would be for company A to continue producing cloth and company B to continue producing jewellery and selling to each other. This would ensure both companies would become better at their specialities and in turn, would lead to a comparative advantage. A comparative advantage is the benefit when you are able to produce a good or service for a lower opportunity cost. 

I experience opportunity cost multiple times on a daily basis:

- Some days, I like to treat myself to a tiramisu or some cake. Although it’s delicious, I am giving up the opportunity to eat healthier. It being delicious is a present satisfaction however, if I ate a salad instead, it would’ve been a future benefit. 

- On the weekends, I like to watch Netflix and binge-watch shows till 12 or 1 am. My opportunity cost is the time I’m wasting when I could be studying and increasing my knowledge. The thrill of enjoying the show is a present satisfaction but studying would be a future benefit. 

- Sometimes I like to workout and help make my body fit. This is a comparative advantage as I’m using my time wisely instead of choosing to stay at home and just lay on my bed. This is a future benefit I am choosing over staying in bed, which is a present satisfaction. 

As presented evident in all the scenarios above, the present satisfaction comes at the cost of a future gain.  

To summarise, opportunity cost is the value a person could have received but gave up in order to receive another item. A quick way to calculate the opportunity cost would be: What’s lost / What's gained. Opportunity cost is truly an interesting concept and teaches us to be aware about what we’re giving up in order to receive an item.