Getting the Record Straight about Opportunity Costs

So I met somebody the other day; let’s call him Ryan, who said something along the lines of, “I didn’t do it. I was suffering an opportunity cost, it would have taken up my time, so I got someone else do it; I outsourced it.” I said, “Oh okay, cool. So what did you do instead?” He responded with, “I went to the pub instead.” We then laughed together – it would have been rude if I didn’t, right?

Now the problem with ‘Opportunity Cost’ is that it’s a term banded about so much that the idea is sometimes misunderstood and therefore some may not use the idea properly as part of their decision making. I wasn’t even sure if Ryan properly understood what an opportunity cost was. Here’s a definition:

“A benefit, profit, or value of something that must be given up to acquire or achieve something else. Since every resource (land, money, time, etc.) can be put to alternative uses, every action, choice, or decision has an associated opportunity cost.

Opportunity costs are fundamental costs in economics, and are used in computing cost benefit analysis of a project. Such costs, however, are not recorded in the account books but are recognized in decision making by computing the cash outlays and their resulting profit or loss.” Source

So, according to the above definition, every action, choice or decision has an associated alternative and therefore, opportunity cost if it’s not taken. To further expand in my own words, an opportunity cost is the cost of something that was not accessible or doable, due to the resource that could capitalise on that opportunity being tied up elsewhere doing something else, therefore you are losing an opportunity and incurring a cost.

Back to our mate Ryan who paid to outsource a task to someone else for him to do because he suffered an ‘opportunity cost’ – the opportunity being, going to the pub.
What’s important to note is that, no matter what Ryan did, he would have always incurred an opportunity cost, as based on the above definition, there is always an alternative and therefore, there will always be a cost. The next most important decision criteria that can be used to prioritise opportunities however is understanding, which, out of those opportunities is the most value-adding.
Now if Ryan valued the opportunity of going pub more than the result of the task he outsourced more value-adding, then he certainly made the right decision and you should stop judging him here ;-).
Where however he used the opportunity cost as an excuse to outsource a task and not take up another opportunity that was equally or more value-adding than the one he outsourced, then he made the WRONG decision and suffered an opportunity cost.

It is an assumed objective that every resource should be appropriated and utilised to undertake the most value-adding activity he/she/it can. Where it isn’t, it is a waste of resource and therefore an opportunity cost is incurred because the resource could be capitalising on another more value-adding opportunity.

My opinion is that Ryan did suffer an opportunity cost, as I don’t see going to the pub as being that value-adding relative to what seemed like a business related task; he may think differently however.

By Naj Hassan

Hey, i'm Naj. Thanks for reading. Please feel free to contact me via the about page.