Opportunity Cost

Opportunity Cost is a term in economics = The cost of any activity measured in terms of the value of the next best alternative foregone (that is not chosen).

Let’s say that a company can only produce 2,000 lbs of wheat or 1,000 lbs of tomato paste within an 8 hour period. The opportunity cost of producing 2,000 lbs of wheat = the 1,000 lbs of tomato paste. The opportunity cost of producing 1,000 lbs of tomato paste is 2,000 of wheat. So, is the choice clear? Do you automatically decide to produce 2,000 of wheat? Let’s assign profit. What if:

2,000 lbs of wheat = $500 dollars
1,000 lbs of tomato paste = $1000 dollars

Still think your company should go for the wheat? I didn't think so. Now, how does that relate to my life? I've been using opportunity cost to make decisions in my life ever since I came across this term in college, it just made so much sense. This is how I use it (*warning to economic majors: do not get on my back, I am going off the text book and we are gonna get flexible for a second here).

First, you assign monetary value to the choices you make, for instance if you want to get a dog, but you know you have to move into a different apartment building to have one. How much will you pay extra every month to live in that new apartment building vs. staying where you are. Let’s say it's $400 extra every month. So, you decide that's too much money. What if the difference was $300, still too much money? If no, then you have just placed a price on how much getting a dog is worth to you. Furthermore, we have just established that: The opportunity cost of you having a dog is the $300 you give up every month, and that’s a trade you will happily make, but if the opportunity cost of having the dog went up to $400, then that’s a trade you won’t make. Same as the tomato paste vs. wheat, the opportunity cost of making tomato paste is the $500 made from wheat which you gladly give up to make $1000 on tomatoes, but if the opportunity cost of making $1000 on tomato paste was making $2000 on wheat, you'd probably choose the wheat right?

You can make almost any decision in your life this way, you can decide what the opportunity cost of having one thing over another is, even without assigning monetary value to things. I happen to find that assigning a monetary value makes things quantitative and easier to calculate, since money makes the world go round, but your call. For my purposes of decision making, opportunity cost can be qualitative (i.e. time, labor, even emotions if you wanna use it to make emotional decisions in your life). You can compare apples to oranges if you want and compare a monetary amount to having a boyfriend, or a dog. For instance, if you get offered the same job in two cities but one pays higher than the other, but the one that pays higher means you have to break up with your boyfriend and leave town. How much is he worth? It sounds cold, but it turns out you CAN put a price on relationships and happiness when you are making a decision, just be sure it’s a price you are willing to pay. So will you break up with him over an extra 10K/year? 20K/year? Or is his love priceless? In this instance, the opportunity cost of staying in your relationship is the money you are giving up by not moving. If you aren't sure, it helps to decide the opportunity cost of your relationship prior to you even being offered the job. This is where you ask yourself - how much money am I willing to give up to keep him?

Is is an exact science? No, but the dog example was my own, except I need to elaborate because it didn't end there. I was willing to give up $300/month to have this dog, mostly because the dog itself was free! Then I thought about it, and in one year I would have paid $3600 for this dog. Instead, if I waited a year, after which I would have to move regardless, and pay more money regardless, and then got the dog, the dog would come at no cost to me because it's a move I have to make anyway. Actually not true, the dog would then cost me $500 which is how much that particular dog sells for. So get a dog now = costs $3600 over a year period. Get a dog in a year = costs $500 on the spot. In this instance you don't count the extra money in rent because it is unrelated to the dog itself. In other words, like I said before, even if I didn't get the dog I would have to pay that extra money. You can even break it down into:

Get a dog now and have companion right away = cost $3600 over a year period
Get a dog in a year = cost $500 plus lack of companionship during the next year.

You can always add emotional benefits to your equations. I am currently working on a table that I would like to post so that your life can be made easy when you want to make decisions. Will post when finished.

College

Top 10 things I miss about college:

1.      Flip Cup and Beer Pong

2.      Taco Bell after Flip Cup and Beer Pong

3.      Mario Kart

4.      College bars with .25 cent pitchers

5.      Intramurals

6.      No class on Fridays

7.      All nighters 

8.      Greek Week

9.      Homecoming Week

10.  Spring Break

Remember the days when you could drink all night, go to bed at 8am and sleep till 5pm, knowing you didn’t have class till 7pm because you were smart enough to do night classes Monday – Thursday.

Remember what it felt like to stay up working on a float till 10am, to then head straight into a homecoming parade, cheering you butt off, and going home to sleep only after the football game was over.

Remember how great it felt to win intramural flag football, or volleyball, or whatever your team was for.

Remember the road trips to Daytona Beach, or Panama City, or Miami Beach (which for us was more like a 35 minute drive from campus).

Only 4 things I disliked about college:

1.      Statistics

2.      Unpaid internships

3.      Networking

4.      Having no money

Some people would add Ramen noodles to this list but I liked them so much I still eat them!