What are ‘opportunity costs’?

An ‘opportunity cost’ is the cost of all the things someone misses out on doing when they make a decision. When someone has to make a direct choice between things, and can only choose one option, this means they can’t choose any of the other things. The thing or things not chosen are the opportunity cost for that person.

This can be as simple as something like whether to spend your last $20 of the month on a ticket for a show or on a meal out for two. If you choose the ticket, then your opportunity cost would be missing out on that delicious meal —plus you’d also miss out on the the opportunity to treat a friend, and the likelihood that they’ll buy you dinner in return some time soon!

This can also get a bit more complex—for example when someone chooses to go to university, they are not only paying the direct costs of attending school, but also the ‘opportunity cost’ of the years of wages they would have earned if they had gone straight to work. In the long run though, there is also the opportunity cost of not going to university to consider, as people with university degrees typically earn higher wages over their entire careers.

There’s an opportunity cost for everything we do. When you start thinking about it it can get a little ridiculous. This morning, you could have gone for a jog, or you could have gotten on a boat and sailed around the world. But you probably didn't factor in the 'opportunity' of a world tour as you ate breakfast.

Where opportunity costs are helpful is for deciding between two (or more) relevant options. If you don’t take opportunity costs into account, you might end up forgetting the benefits of the road not taken and not making the best choice.