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FKD 101

FKD 101: What Is Opportunity Cost?

It’s Friday afternoon and you get a text from your boss. Someone unexpectedly dropped their shift at the local diner and he’s asking if you can fill in for the evening. You could clock in and make some bank…or you could go to the bars with your friends instead.

You obviously can’t do both (unless you have Hermione Granger’s Time Turner), so you need to make a tough choice. What do you do?

In order to make the call, you need to get your econ on and factor in the opportunity cost for either activity.

Breaking down opportunity cost

An opportunity cost is any type of potential benefit that you could’ve had, but you forfeited by choosing another path. You can only have an opportunity cost if you have to choose between two (or more) events. To have an opportunity cost, you have to choose one and give up the benefit of the other.

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The “cost” refers to what you missed out on by choosing the second option. This “cost” isn’t the price of the item, but rather the value of the whatever it was that you passed on.

Bars or bucks?

Following our classic college dilemma, there is an opportunity cost associated with both options: working an extra shift and also going out with your friends.

Let’s say a shift is five hours long and you make $2.13/hour waiting tables. Further, let’s assume the diner will be busy because it’s a Friday. More customers means more tips on top of the $10.65 that you’d earn from working. On a good night you take home $60 in tips on average. Now we’re talking about $70.65 for a night of work. Not bad.

However, you’ve been looking forward to going out with your friends all week. While quality time with your BFFs is priceless, those Long Islands are gonna cost you.

Your opportunity cost for taking the shift is the money you would make, $70.65, while your opportunity cost for bar hopping is however much you value your time with your crew.

Rationality and choice

If every college student were rational, the easy choice would be to opt for the extra shift, resulting in cold hard cash in exchange for our time. However, if you think your Friday night is better spent with your friends instead of making money, your opportunity cost for a night out is higher than the $70.65 you would forego.

So, whether you value cash or drunken memories, just be cognizant that your choices have costs, seen and unseen, that have real consequences.

 

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