What you have to pay when you make decisions
“Life has many options, you don’t always have to choose the one that seems best, but the one that makes you happy.” Paulo Coelho
There are concepts that are learnt and that mark one for life. When I did my master’s degree in economics, Professor Wilson Marin explained to us in one of his microeconomics classes the concept of the opportunity cost of goods and services.
At an economic level, this represents the amount of other goods or services that must be given up in order to obtain the good that one wants. That is, I acquire a good and that good would replace the other good that I would not get. I buy a strawberry cake in exchange for a chocolate one; I gave up savouring chocolate, but I can enjoy the taste of strawberry in my mouth.
In other words, as Banco Santander explains on its website, “it is the cost of the alternative that is discarded when a decision is made and includes the benefits that could have been obtained if that option had been chosen.”
When one makes decisions there is a cost, which in everyday life would mean a “sacrifice” or a “renunciation” of not having another. At university this concept was a revelation not only for me but also for some of my fellow master’s students, who did not have economics background but rather a related career, for example, journalism. In fact, we had several conversations about it and discussed the opportunity cost, for example, between getting married or staying single, between going on holidays or saving the money. The smartest ones analysed the opportunity cost between studying a degree or getting a job.
The concept of opportunity cost popped up in my life again a few weeks ago while on holidays in Ireland. The hotel where we stayed offered a buffet breakfast with a lot of variety. When I had breakfast, I ignored the breads, cakes and croissants section. The idea of opportunity cost came to me when I got to the fruit variety that was followed by the typical Irish breakfast section. This, like the English breakfast, normally includes bacon, sausages, eggs, friend tomatoes, black pudding, baked beans, fried mushrooms, bread and hash browns.
The dilemma began when I asked myself if I wanted to have a portion of fruit with a cup of green tea for breakfast or a typical Irish breakfast. I am interested in health-related topics and that is why I fully knew the benefits of both options. I thought that fruits were going to provide me with vitamins, mineral, fibre, etc., and green tea would provide me with many antioxidants. The Irish breakfast was going to provide me with mostly animal fat and protein. I loved both options, however, the calorie content of the Irish breakfast was much higher.
I finally decided on an Irish breakfast and as a result of having enjoyed it I now have a few extra kilos that I have to burn off by exercising more. Of course, this would not have happened if I had opted for fruits.
The situation was repeated when visiting the Jameson distillery and the Guinness brewery plant where they offer whiskey and beer for visitors to taste the product. I was not going to miss the opportunity to try these drinks served directly at their own house, so I had some Guiness and several glasses of whisky. Of course, the other option was to drink water or a soft drink. I knew that with alcoholic beverages I was consuming sugar and that this was going to affect my weight.
The opportunity cost is taken into account by companies when deciding what they are going to produce. However, it can be applied on a personal level to make well-informed decisions. I have spoken with university professor Luis Carlos Guzmán who has enriched this article with the following examples.
Planning the site for a holiday. I can choose the Fiji Islands, go to the United States or visit a local village. If my decision is the United States, I would sacrifice not being able to be in Fiji or the local village, we refer this sacrifice as the opportunity cost.
They offer a great concert in my city, but that day is the 100th birthday of my grandmother who lives in a nearby town. If I choose to go to the concert I miss the family celebration. That is my cost.
I was invited to go out with some friends to do camping, but I also have my youngest son’s football game. If I choose to go to the game I cannot go camping, it is my opportunity cost for my family commitment.
To conclude, knowing, understanding and applying the concept of opportunity cost is important to make good decisions at both a business and personal level. This allows you to evaluate both the positive and negative consequences of the choice you make. Furthermore, decision-making is made based on the information one has about the advantages and disadvantages of taking a certain option and therefore will prevent us from making hasty decisions.
As my teacher Wilson Marín would say, to a large extent, one is a product of the decisions one makes in life and that is why you have to make a conscious effort to make the best decisions.
Bibliography:
- https://www.netsuite.com/portal/resource/articles/accounting/opportunity-cost.shtml
- https://www.bancosantander.es/glosario/coste-oportunidad
- https://iamafoodblog.com/a-breakdown-of-the-full-english-breakfast/
- https://www.stlouisfed.org/open-vault/2020/january/real-life-examples-opportunity-cost
- https://study.com/academy/lesson/opportunity-cost-definition-real-world-examples.html
- https://fastercapital.com/es/tema/ejemplos-de-costo-de-oportunidad-en-la-vida-cotidiana.html
- https://xepelin.com/blog/pymes/identificar-calcular-costo-de-oportunidad
- https://www.coachingarquitectos.com/el-coste-de-oportunidad-en-la-vida-cotidiana/
- https://economiaplanificada.com/costo-de-oportunidad/
