Opportunity Costs and Your Career
By Anushreya Kondapi
Opportunity costs represent the benefit someone misses out on when choosing one alternative over another. While financial reports do not show opportunity cost, business owners can use it to make educated decisions when they have multiple options before them. In economics, opportunity cost is the cost of not choosing the next best alternative for your money, time, or some other resource.
Opportunity costs, by definition are unseen and can be easily overlooked if one is not careful. Understanding the potential missed opportunities foregone by choosing one investment over another allows for better decision-making.
Opportunity cost is a concept of great magnitude. It is one of those apparently simple concepts in social sciences that are difficult to master and tough to put into consistent practice.
Opportunity costs can impact various — and critical — aspects of your life, including money, career, home and family, and other lifestyle elements. In general, it means having to choose one option over the other, be it money, time or lifestyle choices — and living with the consequences.
An explicit cost is, as one would imply, a cost that is explicitly shown in your accounting records. It’s a cost that will be reflected somewhere in the income statement.
Implicit opportunity costs, the formula is moderately different, primarily because there is no direct accounting cost stemming from implicit opportunity cost.
Opportunity cost = What you are sacrificing / what you are gaining
Any worthwhile formula for measuring opportunity costs weighs on three key factors: money, time and effort:
1. Money
With financial considerations to weigh, the key question to ask before making an opportunity cost decision is what else could be done with that money.
2. Time
Time is a major commodity. In the opportunity cost realm, time can be even more priceless than cash. Consequently, when making any big lifestyle decision, always factor in the time needed by choosing a specific opportunity.
3. Effort
If you choose to start your own business instead of climbing the corporate ladder, business work should be a priority. That extra effort, which could lead to a successful start-up company, could constitute an opportunity cost that is missed if you decide to stay on the corporate track.
By and large, opportunity costs are all about options — and weighing those options before choosing one alternative or another. The goal here is making a decision that leads to value.
Opportunity costs are both positive and negative. Consider these key factors:
When considering opportunity costs, it’s tempting to think like an accountant and weigh the cash you’re spending against the cash you might be getting. But there are ancillary factors to consider, too. Take the law of increased opportunity cost, which can take place even if you don’t spend a single dollar.
In terms of opportunity costs, comparative advantage means a company or an economy is producing more goods or services at a leaner opportunity cost than competitors. Comparative advantage lowering your opportunity cost could include outsourcing part of your production to a country that provides better economic value for that service.
By definition, sunk costs are costs that were incurred in the past, and are unable to be recovered. A sunk cost is not always a bad thing for a business, and is sometimes simply inevitable. Anything that can’t be scrapped is a sunk cost. Relative to opportunity costs, sunk costs shouldn’t factor into ongoing opportunity cost decisions, as they cannot be adjusted or changed.
A risk isn’t the same as opportunity cost. While risk is defined as the potential for a downside result from a business, financial, or lifestyle decision, the opportunity cost is defined as the gain that could have materialized from an alternate usage of the same resource.
Most of the people are aware of the seen costs when it comes to personal finance. We understand the direct costs for our actions. However, the unseen costs could be way more important to realize.
This article is part of the bite-size bundle ‘The 9–5 Truth’ on the Finllect app. Find the Finllect app on Appstore today! 💁
