What theoretical pedagogy can’t drive in, practical examples do! Here are some interesting opportunity cost examples that would definitely strengthen your grip on this simple yet rational economic concept!
Before you sprint towards the opportunity cost examples provided in this article, it is essential that you understand the concept first. So, what is opportunity cost? Well, it is a concept of economics and can be defined as the cost of the next best alternative that you give up in favor of the selected alternative from among a number of mutually exclusive economic utilities, be it goods, services, or investments. It seems rather simple to define, however, the examples given below will clear the concept and help you understand it in a better manner.
List of Examples
These economic instances are being provided with a view to clarify any doubts regarding the real life applications and implications of this simple, yet mistakenly assumed as perplexing, economic concept. Navigate through the following points and you’ll master this concept within a matter of minutes!
#1: Jocelyn has USD 13 and has the option of either buying a music CD or a pair of shorts. If she goes for the pair of shorts, she does so by giving up on the opportunity of buying the CD and, hence, in this case her opportunity cost would be the CD. However, if she opts for the CD, she does so by giving up on the opportunity of buying the shorts and, hence, here, her opportunity cost is the pair of shorts. In this example, the choice is not among several but only between two mutually exclusive items. However, in case of more than two mutually exclusive items also, the opportunity cost is the value of just one item and not the rest of them as only one alternative – the next best – is considered for calculating opportunity cost.
#2: Josh holds stocks worth USD 10,000. He has the option of either selling them for USD 15,000 at present or to wait for 3 months by which time the prices are expected to go further up. Being the cautious person he is, Josh decides to sell them for USD 15,000 today as he is of the opinion that if, instead of rising the stock prices fall then he might incur a loss. By giving up on the opportunity to sell his USD 10,000 worth stocks in future for a price higher than USD 15,000, he is incurring an opportunity cost, the value of which would be decided 3 months later. Therefore, his opportunity cost is the future price of his stocks which may be more or less than USD 15,000 or even lesser than USD 10,000. From this instance, we can see that the next best alternative need not belong to the same time frame as the selected alternative.
Calculating Opportunity Cost
Once you’ve understood the theory part, you must be wondering how to calculate opportunity cost. Mathematically speaking, this figure is nothing but the difference between the value of the selected alternative and the value of the next best alternative.
Noel has just graduated from medical college and he has been offered a job at one of the most prestigious hospitals in town. The job would pay him USD 45,000 a year. However, his uncle, who runs a health care and fitness center, has also offered him a position for USD 35,000 a year. However, Noel wishes to enroll for a medical research program at a foreign university, which would cost him USD 38,000, and eventually does so. Calculate his opportunity cost.
Number of Economic Alternatives = 3 (USD 45,000 job, USD 35,000 job and -USD 38,000 research program)
Desired Alternative = – 38, 000 (shown in negative as it this alternative would cost the subject rather than earn him financial remuneration)
Next Best Alternative = 45, 000
Since, Opportunity Cost = Cost of Selected Alternative – Cost of Next Best Alternative
Therefore, Opportunity Cost = -38, 000 -45, 000 = -83, 000
Hence, his opportunity cost not only includes the cost his Desired Alternative would incur but also the value of the Next Best Alternative which he gives up.
That should clear up any theoretical or practical doubts regarding the opportunity cost concept. There are lots of opportunity cost examples in our daily lives when we are faced with making economic decisions from among scarce choice. After all, the very principles of economics are founded upon the cornerstone of scarcity and choice! With that I sign off, wishing you good luck and splendid grades!