Society's resources are limited, and people inevitably face trade-offs when making certain choices. When you make a decision, you are not only choosing what to do, but you are also choosing a multitude of things NOT to do. Examples are numerous:
⚖️ Studying/working all day - inability to use this time for other activities;
⚖️ Every purchase now is at the expense of another purchase in the future or savings;
⚖️ Rent an apartment and distribute the available capital between the assets of the investment strategy; or buy your own home…
This is a very important concept in financial planning and decision-making for optimal use of resources — such as time and, of course, money 💳
Opportunity costs and costs can easily be overlooked because benefits are often unrealized and therefore hidden from view.
🔗 Let's look at this from the investor's perspective.
I often hear radical comments about some asset. Like, "only this instrument is normal, it will definitely grow, all the others are 👎🏼👎🏼👎🏼"
Sometimes these people use arguments with profitability, their case... but the point is that they often miss important details.
A single dry figure of return (for example) is not informative enough. Therefore, there are such concepts as term, liquidity, risk-return ratio, etc. Next to them is the concept of opportunity cost, that is, the lost benefit from the unselected option.
🔗 Let's look at it from the perspective of personal expenses.
For example, a person may compare their current job with lower earnings but a larger social package against a new offer with higher income but fewer additional benefits.
This often applies to expenses - repairing an old car or buying a new one; buying cheap shoes for one season - or a more expensive pair that will last longer?
🔗 Business also pays attention to opportunity cost.
Example - an entrepreneur chooses between renting two offices:
Option A – 20,000 UAH per month, but far from your own home and the homes of your employees.
Option B – 23,000 UAH/month, but very convenient location.
The alternative cost of the more expensive option is UAH 3,000. But the alternative also arises in the form of time and cost of completion, which may later show that Option B is cheaper.
Opportunity cost is also considered when choosing a financing tool for your own business; automation, hiring new employees, purchasing new equipment, etc.
Every decision involves benefits gained and lost. By understanding what you are giving up by not choosing a particular option, you can better compare the value—that is, the opportunity cost—of a decision.
Therefore, expand your vision, analyze in 3D format😄