Decision-Making - Opportunity Cost

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Everyone of us has limits to our capability.  We are limited in our knowledge, skills, ability, attention span, etc.   Our most critical limitation is the resources available to us time, energy, and investment capital.    Time is probably the most limited constraint to achieving our potential.  If we had more time, we could trade it for nearly everything else we might lack.   Thus, the number of wants and needs we can attempt to satisfy in our lifetime is limited because our personal resources are limited.   Within our lifetime, we can only attend to and attempt to accomplish  a limited number of our aspirations.   So, we must choose wisely.   What we spend our resources on and what we accomplish with them defines our life.

Each person must choose what they spend their limited resources on and this choice represents what is most valuable to them.   Whatever want or need a person decides to expend their limited resources pursing is presumed to be the most important need to them at that moment.   This also implies that all the other things that the decision-maker could have chosen, but didn't, are less valuable to that person.  The concept of opportunity cost implies that whatever ends (wants or needs) the decision-maker elects to satisfy and/or whatever means (actions, activities, and resources) spent in their pursuit are the most important or best of all available choices.   In contrast, all other ends and means not selected are consider to be less important.  The relative value of then next highest of all alternative not selected is the  value that the decision-maker is giving up (forgoing or sacrificing) in order to purse those alternatives that have been selected.  

Opportunity cost is consider the implicit value of the alternatives not selected.   One must always be aware that once they make a choice, the choice implies that they are giving up the rights to spend their limited resources on all the other ends that they could have chosen but didn't choose.  If one chooses to do one thing, the they cannot do another simultaneously because of the physical limits of their resources (time, energy, and investment capital).  In summary, opportunity cost can refer to two related sacrifices.  One, opportunity cost is equal to the highest value (effectiveness) of all competing wants and needs (ends) not selected for attention.   Two, for any selected want or need (ends), the opportunity cost is equal to the highest value of all competing alternatives (means) that could have been chosen to satisfy the ends but weren't.   The important point regarding opportunity cost is that choices have two costs: one, the direct cost (out of pocket expense) of the resources required to satisfy them and two, the indirect cost of opportunities lost because alternate wants and needs were not selected and satisfied.  The later indirect cost is what is regarded as the opportunity cost.   It is important to remember the opportunity cost of any decision, because you are giving up something in order to do what you have chosen. 


Website last updated on 10/19/08
Copyright 2005 Charles W. Sooter.  All rights reserved.