Higher Rock Education - Economics Blog

Wednesday, April 15, 2015

An opportunity cost is an economic concept that recognizes that every decision we make has a cost associated with it. When I purchase a car for $20,000 the cost is really greater than $20,000 because I forgo the use of the $20,000 to either invest or purchase another item. If I choose to sleep late, I forgo the opportunity of using the time to do something else.

Many decisions we make have long-term implications. Attending college after high school is one. A few high school graduates are so skilled in an area that they would earn more by forgoing a college education. Does the difference in income justify the expense of attending school and the higher expected income? Download our free interactive exercise found in our lesson Opportunity Cost - The Cost of Every Decision (written in Excel). It is intended to help think through the process of choosing whether or not to attend college by examining your opportunity cost. (It is not intended to precisely calculate your opportunity cost.)

Smoking cigarettes is another decision that carries a very high opportunity cost. In addition to the cost of the cigarettes there are added insurance costs, health related expenses, lost income from missing work due to health issues, and the lost opportunity to invest the money spent on tobacco. The attached USA Today story estimates the cost of smoking could be as high as $2 million over a lifetime.

I am more responsible with my time and money when I consider the opportunity costs of decisions I make. I do less impulse buying, more research on investment options, and take a harder look at my priorities. I am happier because I am more confident in the decisions I have made. Ponder your opportunity costs, and the fact they go beyond the mere cost of an item you purchase or the time you spend doing something. I believe you will be glad you did.

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