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Opportunity Cost

Opportunity cost is the loss of the benefit that could have been enjoyed if the best choice was chosen instead.
#economics
Zettelkasten, June 03, 2021

Notes

  • Opportunity cost is the loss of the benefit of the best foregone option that you could have chosen.

    • You have choices A, B, and C with Ba=100B_a = 100, Bb=80B_b = 80, and Bc=50B_c = 50 as their respective benefit. Considering you've chosen the best option, A, your opportunity cost in this scenario is 8080 because it's the benefit of the best foregone option.
  • It's a microeconomic theory.

  • It's a decision mental model because it helps you decide to choose among options.

  • It's not easy to calculate the exact cost of all options because some are unseen because of the implicit costs.

    • Implicit costs: these costs are hidden to the naked eye and aren't made known. They're not a direct cost to you. For instance, if you have a vacation home, the implicit cost is the rental income you could have generated if you leased it.
      • Implicit costs have significant potential. If you choose to start a company instead of earning a known salary, you can make much more than the salary.
    • Explicit costs: they're direct costs of an action, executed either through a cash transaction or a physical transfer of resources.

References

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