What is opportunity cost?
I first learned of this term back in my economics class in high school. I even remember the discussion around it. It went like this: if you owned an airline and only had 100 of the 200 seats filled, would you lower the price of the remaining seats to get them filled? If you would, what is the consequence? If you would not, what is the consequence?
There were a good amount of students in my class that refused to lower the price. There were a few students, myself included that would lower the price. Those that were against lowering the price wanted maximum revenue from the flight. I wanted some revenue. An unfilled seat means zero revenue. A seat filled for $50 even if it doesn’t allow for a profit will help offset expenses.
What is Opportunity Cost?
This is what opportunity cost is. What do you give up by doing something else. A good example is attending college. By going to college, you are giving up earning a salary for four years. You choose to go to college because you believe that you will earn more money during your career because of your college degree, which offsets the lost wages.
While I do not do it 100% of the time, I am usually making my decisions based on the opportunity cost. And they aren’t always related to money either. In a relationship, what is opportunity cost of leaving the toilet seat up if you are a man? You can either take the three seconds it takes to put the seat down and be done with it, or you can choose to leave the seat up and deal with the aftermath from your spouse.
Some opportunity cost comparisons are more complex. Like whether to invest or pay off debt. In this case, you have to look at both the financial trade-offs as well as the emotional trade-offs. You may realize financially it makes sense to pour all of your extra cash into mutual funds, but you know that you cannot sleep at night knowing you have a car loan. The emotional aspect of this decision might weigh more heavily on you than the financial, so even though it makes financial sense to invest, you personally feel better paying off the debt.
Final Thoughts: What is Opportunity Cost
Whatever you decide is the right decision for you. Realize that in the end, you have to be happy with the decision you make. All I am asking is that before you make decisions, you ask yourself what is opportunity cost of choosing one over the other and take into account all consequences, not just financial.