We all have to make choices. Do you study or go to the ballgame? Do you buy pizza or a hot dog? When you make one choice, you forgo another choice. This is called an opportunity cost. However, not all choices are so simple. Some of our most important choices involve time and money.
- A person decides to go to school instead of working full-time. The opportunity cost is the amount of money that would have been made from the job.
- A football player decides to go to practice instead of going with the family to the lake. The opportunity cost is the trip to the lake.
- A lawyer decides to paint his own house instead of paying someone $1,200 to paint it for him. The lawyer makes $400 an hour. It took him five hours to paint the house, so the opportunity cost is $800.
To make the best choice, we want to get the most benefit with the least cost. Nothing is free.
An example is a doctor that would earn $150 per hour. He can mow his own lawn for free, or hire someone to mow the lawn for him. He thinks it doesn’t cost anything to mow his lawn, so that would be the logical choice. However, there are opportunity costs associated with his decision. He could have worked and earned $150 in the hour it took to mow his lawn. It would cost $25 for the neighbor kid to mow it, so the doctor would lose $125 by mowing his lawn himself. What if it is a Saturday and he wouldn’t work anyway? The opportunity cost could be playing a round of golf or watching his kids play in a game.
Another example is a car repairman that needs to decide if he will do his own payroll or pay a professional to do his payroll. He thinks it doesn’t cost him to do the payroll himself, so that is the logical choice. However, he has cars waiting to be repaired. The true cost is the opportunity to repair the cars and make money as well as retaining loyal customers since they know they are important to the repairman.
In the first example above, the person that goes to school will forgo the money from a full-time job, but the benefit of having a life with a higher paying job makes it worth the cost to many college graduates.
A wise person will consider which decision will bring them the greatest benefit with the least amount of cost. Consider the possibilities! For me, I’m going to hire the tree cutter and forget about the trip to the emergency room.