All economics students learn this early on:
Opportunity Cost is the Value of the Next Best Alternative Foregone. (If you could not state this on your own, better check out our post on Economics Definitions.)
A very important concept in economics theory and a powerful concept for life.
My wife was recently considering purchasing a super-duper powerful cooking machine, an all-in-one blender, steamer, fryer, chopper etc etc with 3000 recipes in-built versus a much less powerful, fewer functions kitchen equipment. We were all amazed by the first machine except that it cost a whopping S$3000! I am glad my wife decided to buy the S$500 one as she reasoned that would mean having S$2500 more of kitchen equipments she could purchase. I think she made the right decision having factored in opportunity cost. This is not always the case. (I hope she isn’t reading this!)
Some behavioural economists have pointed out that humans are not so rational and often fail to fully consider opportunity costs. This is perhaps a possible evaluation point that students could make in the examinations depending on the exact question. (Often questions assume rational behaviour.) After all, behavioural economics is becoming of greater importance and if you have not, you should check out the video on Cognitive Biases & Insights in economics decision making.
One related problem is that we tend to self-sabotage. Self-sabotage involves any attitude or behaviour that interferes with your ability to achieve your life goals. That is irrational right? Yet it is so common!
Some weeks back, I spent several nights gaming online. I did not seriously consider the opportunity cost of foregone sleep. As a result, several days were unfruitful. Due to sleep deprivation, I was mostly moody, postponed several videos that I had planned to do and did not have much quality conversations with my family members. I was certainly not achieving any life goal! Looking back, it was also such a waste of time. Even if I could not bring myself to bed early, I could have at least devoured some useful videos that would contribute to my life goals.
Sigh, I need to remember this lesson myself. That whatever choices we make, we are giving up something in return. So we need to think about what we are giving up and whether that is truly worth it.
It seems, that when we can clearly articulate and state the opportunity cost, like in my wife’s case above, it improves our decision making.
Self sabotage appears to be a common problem. When people self-sabotage, they regularly engage in self-defeating behaviours like procrastination, perfectionism, negative self-talk, avoidance, or conflict (reference site).
This makes me think about my students as well. A number of them appear to avoid doing assignments or procrastinate or are just simply glued to social media or trying to keeping up with the Joneses in school so much so that they don’t have enough time for the more valuable goals. I am worried for them because I know, with data over 2 decades, that there is a very strong correlation between doing regular assignments and acing the economics exams with ease.
A reminder for all students: Do not forget that in economics, all costs must include opportunity costs!
For example, to derive economic profits, we have to take into consideration opportunity cost. In rational decision making analysis, opportunity cost must be considered. When we evaluate government policies, very often the opportunity cost of funds is a key problem or issue to point out. In life and also for your exam purposes, the knowledge of what exactly is the opportunity cost, is also a difficult point to achieve. What is the next best alternative? And what is its value? This could be part of an evaluation point. And don’t forget that the Production Possibility Curve (PPC) can be used to illustrate Scarcity, Choices and Opportunity Costs! Especially realistic is increasing increasing opportunity costs due to imperfect mobility of factors of production. Opportunity cost is also involved in deriving a country’s comparative advantage. Wow…as you can see this one concept cuts across many topics in economics.
Final reminder for all students: Remember that when you are doing the IB or A Level economics exams, do not get stuck for too long on any question. Remember opportunity cost! Some students do very poorly in Case Studies because they fail to move on to other questions and end up losing lots of marks. You should follow our DUO Time Strategy Method – tried and tested, proven to work superbly. If you are not yet one of our students, check us out: Best Online Economics Tuition in Singapore.
So long for now. My opportunity cost is calling.
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