Opportunity Cost

“Time is money” -Benjamin Franklin

A simple statement that helps define the concept of opportunity cost. Opportunity cost is not just the cost of the item or activity you are attending, but the cost of the activities, items and time you are giving up in order to obtain your want. Opportunity cost may at first seem to be only the cost of your activity (say $100 to see a baseball game), but it is really much more. To find the true opportunity cost of an activity, you need to account for the things you are giving up as  well. For example, in the 5 hours you are spending watching the baseball game, you could be doing other things, such as spending time with your family, or reading a book, or cleaning you house. These things can be priced upon personal value, meaning they can be compared against the value of the baseball ticket. So the actual price of going to the baseball game is not only the price of the ticket, but the personal cost of whatever activity you are choosing to give up as well. These things are known as alternatives.

You can sum together all of you alternatives into a single price to understand the real opportunity cost of your chosen activity, right? Wrong. You can’t sum these values together because you don’t have enough time to do them all. You only have time for one alternative. Let’s say for example that instead of going to the baseball game you could instead spend time with your family for 5 hours or work on a book you are reading for 5 hours. Now, the opportunity cost is not both of those activities because even if you did not attend the baseball game, you cannot spend time with your family and read your book because the sum of time is 10 hours, and you only have 5 available hours from not attending the baseball game. For this reason, you cannot sum together the value of all your alternatives as being part of an activities opportunity cost.