Opportunity Cost
A daily concept that I wanna remind myself all the time. -- Always measure the opportunity cost of my study, my travel, and my life.. :-)
Opportunity cost is the value of the next-best choice available to someone who has picked between several mutually exclusive choices.
Examples:
A person who has $15 can either buy a CD or a shirt. If he buys the shirt the opportunity cost is the CD and if he buys the CD the opportunity cost is the shirt. If there are more choices than two, the opportunity cost is still only one item, never all of them.
An organization that invests $1 million in acquiring a new asset instead of spending that money on maintaining its existing asset portfolio incurs the increased risk of failure of its existing assets. The opportunity cost of the decision to acquire a new asset is the financial security that comes from the organization's spending the money on maintaining its existing asset portfolio.
15 Jan 2010 18:07
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Tags: Random
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Hello;
I think this is a topic of “risk management”. Dividing risk between different investments to prepare your company (or even yourself) for some variable results. But I don’t think you always need to consider opportunity cost. The word “next best choice” can also be variable. It could change on different situations and/or different opinions.
For your example my opportunity cost may be “a scarf” if I buy one of your choices. Sometimes; you have to consider the opportunity cost even before deciding. But for me it shouldn’t be a necessity to consider it in every situation. Don’t look for the opportunity cost in every matter. Sometimes it would kill all the fun and benefit to make that decision. Also it would be rather confusing generally.
Cheers.
17 Jan 2010, 15:14
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