Opportunity Costs and Tradeoffs

Opportunity Costs
Whenever we make decisions, opportunity costs are involved. An opportunity cost is a term
or value used to describe the value of the alternative choices, one that isn’t chosen. For
example, when choosing to hang out with friends or studying for an exam, choosing to
hang out with friends will forego the opportunity cost of time studying for an exam, and the
same is true vice versa.
Opportunity costs drive the economy, as it is essentially involved in every decision made by
individuals, governments, and businesses. The opportunity cost of every alternative choice
foregone by an individual helps to fuel supply and demand, and emphasizes the
importance of effective decision making. An individual could decide to spend money on
certain items or save money buying an alternative. A business can hire employees or spend
more initial money on automation. A government could weigh the impacts of emissions or
pass on economic policy that could negatively affect the environment. These are all
examples of choices different entities make with different opportunity costs.

Analyzing Opportunity Costs & Trade-offs
To analyze opportunity costs and beneficial trade-offs, a cost-benefit analysis is used, which
is a method to compare the costs and benefits of a decision, project, or policy. This involves
concrete and abstract metrics, and quantifies and measures costs, helping the individual
determine if benefits outweigh costs. Besides the monetary value in evaluation for
cost-benefit analysis, other metrics such as customer satisfaction, environmental impact,
and time can be used when making decisions.
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Parting Shots
- Should the government spend more money on the military or education? Why?
- What is a recent decision that you made? What was the opportunity cost of that?
- Why do you think analyzing opportunity costs and tradeoffs are important in
running a business?