Understanding Opportunity Cost

by Elisa Adams

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Do you ever heard of opportunity cost? No matter your answer is ‘yes’ or ‘no’, I recommend you read this as understanding the concept of opportunity cost is important in doing financial management.

So what is opportunity cost? Opportunity cost is simply the cost that we have to pay when we forgone something to get something else. There can be many alternatives involved but you have to choose the most desirable alternative in order to forgone another choice. And this situation happens because the limitation of resource that you have which is most of time – money.

Believe it or not, we face this concept of opportunity cost everyday in our life.

Let’s see an example. You only have $10 in your hand. Then you have to choose whether to buy food or stationery. If you buy food, you can’t buy stationery and if you buy stationery, you can’t buy food. As the result, you have to choose either thing that you really have to buy which is the best alternative for you. This situation defines what opportunity cost is all about.

By understanding this concept, you will realize that we have limitation in our life. In other word, it is called scarcity. It means that you have to use your resource wisely by choosing the best choice in front of your eyes.

In fact humans never get satisfaction to fulfill their desires. Today we got one thing and tomorrow we want another one. Each individual has their own personal opportunity cost which means the best choice for someone is depends on the person him/herself.

Always keep in mind that every choice has its own value and you have to choose the best one for yourself. And this is what we called wisdom – which is above the level of intelligent. You have to decide what is worth spending for or you will end up in loss. Limited resource means that there is no turning back so make sure you make the right decision. Make sure it’s better to by A rather than buy B because A is really beneficial for you than B. That’s how it should work.

You might happened to face any of these situations:

  • Buy car or motorbike?
  • Buy laptop or PDA?
  • Buy chicken or fish?
  • And etc.

Decide wisely. And you will get the best choice for yourself.

{ 3 comments… read them below or add one }

InspiroHost October 29, 2010 at 8:45 pm

Opportunity cost is defined as the cost of the next best option forsaken. This applies not only to monetary terms but otherwise too. Let’s say during an hour, I have an option of either watching a football match or going to a concert with a friend. If I choose to go to the concert, the opportunity cost is watching the football match on the expense of which I decided to attend the concert.

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Organic SEO January 9, 2011 at 12:59 am

Very much informative post. I like it. Thanks for sharing in the web.

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Salwa April 13, 2011 at 12:52 pm

Quite informative.

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