The Momentous Nature of the Opportunity Cost Concept

We start each day making choices – “should I hit the snooze button and get 10 more minutes of sleep, or should I get up and start my day 10 minutes earlier?”. Immersed in our daily routines, we sometimes forget that every choice we make (even the tiniest ones) have an opportunity cost implied.

It seems common we lack understanding the opportunity cost concept and its importance.

The pervasiveness of the opportunity cost cannot be higher. There is seldom any decision, in any human field,  that doesn’t have anything to do with it, at any level: individual, family, company, national and global level.

Simply expressed, the opportunity cost is the cost given up by choosing a) instead of b), or c), or any other alternative. When selecting a job, a girlfriend/boyfriend, a trip, a car to buy, the decision arrived to, necessarily implies having given up the rest of the alternatives. When the decision made is appropriate, the opportunity cost tends to be irrelevant; otherwise, it can become very onerous, indeed.

When the opportunity cost concept is combined with that of inertia, things get much more complex, yet more interesting. We humans tend to have very well defined –and most of the time, hard-to-crack habits. Unfortunately, some of them aren’t commendable; the good habits, understandably, must be kept and enhanced. For that purpose, the capacity to learn from others and from life itself is priceless.

Going back to what I’ve previously mentioned in other posts: acting as an “individual-clump”, it is of vital importance to keep this in mind whilst making decisions. By this I am referring to the fact that we should not only have ourselves in mind when choosing from a variety of options, we should consider the fact that as individuals, we are inherently a part of this social clump. It is of vital importance to consider all sorts of opportunity costs that we stumble upon, in order to act more effectively as this greater individual we are all a part of.

One of the major aspects of an increasingly globalized world is the abundance of choices. Hence, the great importance of learning, and striving to making better decisions everyday, whenever possible. It sounds simple enough, but most of the time it isn’t.

As the saying goes, what cannot be measured cannot be improved. This measurement specifically refers to the opportunity cost. We all are fully aware that both, the (w)World and the way countries are governed are far from perfect. Nonetheless, it is quite easy to differentiate the better managed countries from the less privileged ones. Taking that notion further, it is possible and indeed useful, to make rough comparisons among nations’ performances. For that purpose, an indispensable step is to select a reference group, as the benchmark against which everyone outside the group should be compared to. Once that exercise is made, some astonishing results emerge; for example, China’s 2010 GDP per capita was US$7,600; if China had a GDP per capita equal to that of Lituhania (US$16,000), Russia (US$15,900) or Chile (US$15,400), it would mean an additional production of around $10 trillion US dollars of goods and services every year. Ten trillion dollars is currently the combined yearly GDP of Japan, Germany, Russia  and Poland, the third, fifth, sixth and twentieth economies in the world. This is China’s opportunity cost when compared to Chile, Russia and Lithuania.  By making this kind of comparisons, it is very easy to gain a better handle on the Chinese economic miracle –which has more to do with remarkable rate of economic growth (a huge plus), than with current affluence of the Chinese population which, on the average, is still very poor, very far from a developed nation standard. During 2010, the average GDP per person in China was slightly less than a third of that of Portugal ($23,000).

Naturally, this kind of comparisons, however valid and useful, will not automatically lead to a good port if a skillful program isn’t implemented to take advantage of the colossal potential (wasted opportunity cost) implied. GLOBALIZATION, the book, contains multiple easy-to-understand comparisons like the previous one, all leading (lead) to workable, self-sustainable solutions.

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  1. […] about ⅔ of mankind. Luckily, the other side of the coin shows a universe of potential, and opportunity, ahead for everybody, the unfortunate citizens of those failed nations, and the rest of the world, […]

  2. […] side of the same coin is the stubbornly and painfully high unemployment levels. In short, the opportunity cost of the miserable current state of affairs is humongous, several hundreds of billions of dollars a […]

  3. […] Yes, it will be a monumental challenge to successfully assimilate droves of immigrants from the poor and poorest nations into the developed world. Nonetheless, the alternative to essentially maintain the status quo is too costly to even deserve consideration. More on the opportunity cost concept. […]

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