Step into the shoes of a middle-manger in a tech company, who has multiple tasks at hand. You have the responsibility to finish a critical project, while at the same time, you're being invited to a strategic meeting which could broaden your professional network. Here, you're stuck with a crucial decision to make. Which is more valuable: progressing with the project, or attending the meeting? This is where the concept of opportunity cost comes into action.
Opportunity cost refers to the potential benefit a person or a business misses out on when choosing one alternative over another. The concept emphasizes that the potential of an individual or business to increase their wealth is always limited by scarcity (in this case, it would be limited time or resources).
The concept underscores the idea that every choice we make involves a trade-off. Recognizing the opportunity cost is valuable as it aids an individual or a business in ensuring that their resources (i.e., time, money, effort) are being used most efficiently.
Opportunity cost is typically calculated in terms of the trade-off between the options that a person or a company has at a given time. In monetary terms, it's expressed as the difference between the cost of the chosen option and the benefit that the best alternative would have provided if chosen.
Now, let's reconsider the scenario at the beginning. As a manager, by attending the meeting, the opportunity cost for you would be the tangible progress that could have been achieved on the project. Conversely, if you decide to work on the project, the opportunity cost would be the potential networking opportunity and knowledge gain missed from the meeting.
For making the decision, you will need to determine which option provides the highest net return or benefit. If the completion of the project on time adds more value or benefit to you or your team as opposed to the expected outcome from the meeting, and vice versa, that should guide your decision.
Understanding and applying the concept of opportunity cost aids in making informed decisions in both personal and professional life. It helps us to choose the most beneficial and efficient route from many alternatives. In a world where resources are limited, mastering the concept of opportunity cost can certainly guide us towards better decision-making processes.