Opportunity cost is a key concept in economics. Being an economist myself and also being an active financial markets participant, I think in terms of opportunity cost everyday. However, it strikes me how few people actually know about this concept.
Loosely defined, opportunity cost is a foregone alternative when a particular course of action is pursued.
In a general financial sense, the opportunity cost of money tucked away in your mattress for one year would be the yield you would get in a bank account for the same period (ignoring any potential risk in the investment). From a general micro-economic perspective the opportunity cost for a consumer to buy a shirt would be buying something else of the same price, say a CD. You can’t have them both, and in a way the price you really pay for something (assuming a finite amount of money) is not the dollar amount but the opportunity cost of something else. This concept applies in many other different areas as well and can, as I will show, be of great use when optimizing your life. Obviously not all opportunity costs come in the form of a monetary price. For example, if you spend an hour laying on your couch watching television, you could see the opportunity cost of that as getting your laundry done. When it comes down to getting things done – as long as you have things to do – everything has an opportunity cost.
