Hidden ‘cost’ of Opportunity Cost

As economists (assuming that most of our readers have a vague interest in the subject matter we keep on harping on about most of the time) we should all be aware of, if not au fait with Opportunity Cost.

English: A production possibility frontier sho...
A production possibility frontier showing opportunity costs of moving between two of the points. (Photo: Wikipedia)

As a one line refresher: Opportunity Cost is the cost or value forgone by choice. Choosing one option or outcome over another, automatically leads to an alternative opportunity forgone, hence the cost element.

So the real challenge is to extract the ‘right’ amount of value or benefit from the chosen option versus the forgone option. This is the real difficulty when the counter-party does not share the same or a similar risk profile.

What is the answer then?

Well as vaguely competent economists our stock answer is: It depends!

Wieser coined the terms marginal utility and o...
Wieser coined the terms marginal utility and opportunity cost. (Photo: Wikipedia)

Lets peal this back one level and start with the this position: the very fact that you had a choice in the first place is a very good thing. A lot or market participants are never really afforded the luxury of this or any choice. They just have to lump it and get on with whatever activity keeps them sustained. Therefore, from this extreme position an answer might be that we should count our blessings and just accept the inevitable and get on with choosing and working through the consequences.

However, in a world driven by value maximisation, the fact that we have to make the optimum choice does become more significant and important. What tools can we employ in a world of Information overload, yet still Information Asymmetry to come up with the optimal solution?

Choices
Choices (Photo: Scarygami)

Answer on the back of a postcard please…

One thought on “Hidden ‘cost’ of Opportunity Cost

  1. You can apply the concept of opportunity cost to land as well. If we assume that land can either be used to produce corn, or it can be used for raising cattle to produce beef, but it cannot be used to do both at the same time, we have two choices and we must make a decision. Let’s say we’re already producing corn, but we want to switch to raising cattle so we can produce beef. In this case, the opportunity cost of switching from producing corn to raising cattle is the amount by which the production of corn decreases, because that’s the value of our next best alternative.

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