Sometimes a new exciting opportunity presents itself, when we are completely happy about
our existing life situation.
If that happens, we are forced to think about opportunity costs.
This is because when we look at the new opportunity,
we compare it with our current situation and
think about what is at stake if we would go for it.
This often happens without us being able to see the full picture.
Economists define opportunity cost as the benefit we forego, as we trade-off one alternative
to keep another.
— hoping we make the best choice.
Although they are often less obvious and sometimes speculative, opportunity costs can be huge,
therefore, learning about them makes sense.
Imagine that we are trying to calculate the true cost of going to college.
One factor can be tuition, which in our case is 10,000 dollars.
Since that’s our only cost, you might conclude that the cost of college is 10,000 dollars
a year.
But to economists, that's not quite right.
Because we have to add the money we could have earned by working, instead of attending
college.
Let’s say that by working full-time in a local restaurant, you can earn $20,000 a year
.
The true costs of going to college are, therefore, $10,000 tuition plus $20,000 in opportunity
costs.
By studying for a degree, we trade off 30,000 dollars a year.
Although, that's only half the story because it also goes the other way around.
Assuming we go to college for four years, we trade-off $120,000 for an education that
leaves us with empty pockets, many ideas and a degree.
However, once we are better educated, we might be able to make $40,000 as managers instead
of the $20,000 in service.
In such a case, not going to college ends up being much more expensive.
Do you understand the concept?
Show us!
Calculate the opportunity costs of a high school student who drops the idea of earning
a degree in medicine, and instead chooses to help in the family business.
The cost for tuition and living is $2,000 a month.
It takes a total of 6 years to finish university.
After obtaining her degree she works in the field of medicine for 34 years earning $10,000
a month and spending $3,000 on monthly living expenses.
If she is entering the family business she earns $3,500 a month right away for the next
40 years with zero living expenses.
What’s financially the better choice?
Post your calculations in the
comments below!