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Decisions, decisions! Every day we come across situations in which we have to make a choice. Economists have long realized that when we make decisions, we are considering our unlimited wants against limited time, money, services, and opportunities. Every time we choose, we weigh the cost of one item we can have now against something else we have to give up. Economists call this “opportunity cost,” and you don’t have to have a PhD in economics to benefit from knowing how the concept works and how it can improve our life choices.
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A simple choice between buying a dinner in an expensive restaurant and at a more affordable food stand can illustrate opportunity cost. The money you spend on the high-class restaurant meal is certain to be more than one at a food stand. If you choose the restaurant, you will enjoy a good meal and the enjoyment of fine dining. However, the extra money spent on that meal compared to the food from the food stand will be lost. You sacrifice a cheaper meal for a costlier one. This is an example of “opportunity cost.”
Should you go to college? That would take at least four years plus the expenses for tuition, books, and other supplies. During that time you would probably not be earning any money. The lost opportunity of earning money is your opportunity cost of obtaining a college degree. Before you make your next purchase, whether for a house, car, college degree, or just a coffee, consider what you must forgo to make that purchase.