Mastering Opportunity Costs

Understanding how opportunity costs and the influence it has on your financial life is possibly the most valuable lesson to learn in 2021

What do economists think about strawberry smoothies? That depends on how good the kiwi flavour is instead—plus a range of other choices. Which stirs up the idea of opportunity cost.

How is opportunity cost defined in everyday life?
“Opportunity cost is the value of the next-best alternative when a decision is made; it’s what is given up
We can’t have everything we want in life. This is where scarcity factors in. Our unlimited wants are confronted by a limited supply of goods, services, time, money and opportunities. This concept is what drives choices—and, by extension, costs and trade-offs.
An example of deciding to buy a R30 smoothie at the mall. Many people would view the choice as a single one based on whether you want the drink.

Instead, you should wear a unique pair of ‘economist glasses’” to see the decision differently, asking:
How much do I value this?
What am I giving up now to have this?
What am I giving up in the future to have this now?
Our inclination is to focus on immediate financial trade-offs, but trade-offs can involve other areas of personal or professional well-being as well—in the short and long run.
Don’t only consider explicit alternatives—the choices and costs present at the time of decision-making—but also implicit alternatives, which are “unseen” opportunity costs.
It’s about thinking beyond the present and assessing alternative uses for the money—that is, not being shortsighted.
Understanding and using the principals laid out in opportunity costs is one of the most powerful lessons an individual, interested in growing wealth, can learn. It is a fundamental skill required for long term financial success.