Opportunity Cost & Costs Benefits Analysis, A Model to MAXIMIZE GAINS & Decide Better from NOW on

Summary

This explainer video introduces the concept of Opportunity Cost, also known as Alternative Cost. It explains that Opportunity Cost is the value of the best alternative not chosen when making a decision. The video highlights how Opportunity Cost is crucial for rational decision-making, touching on both explicit and implicit costs. It also introduces the Costs/Benefits Analysis as a tool for evaluating complex choices. The video concludes by encouraging viewers to consider Opportunity Costs in their decisions and to share the video if they found it valuable.

Takeaways

• 💡 Opportunity Cost, also known as Alternative Cost, refers to the value of the next best alternative that is not chosen.
• 📚 The concept is rooted in microeconomics, dealing with the trade-offs we face when making decisions.
• 📊 The formula for Opportunity Cost is: Opportunity Cost = Cost of Chosen Alternative - Cost of the Next Best Alternative.
• 📖 Dictionary.com defines Opportunity Cost as the money or benefits lost when pursuing a particular action over another mutually exclusive alternative.
• ⏳ The concept was first mentioned in 1894 but can be traced back to Benjamin Franklin’s idea of 'Time is Money' from 1748.
• 💵 Opportunity Costs can be explicit (clearly stated costs) or implicit (implied by the choice of resources).
• ⚖️ Costs / Benefits Analysis is a related decision-making tool where all costs and benefits are listed and compared.
• 🏠 In an example scenario, Bob weighs the opportunity cost of buying a house against leaving money in the bank and earning interest.
• 💭 Implicit opportunity costs include potential benefits, like renting out a house, which may not be immediately obvious.
• 📈 Complex situations may require a broader approach, considering both numerical and non-numerical factors like emotional costs or inconvenience.

Q & A

What is Opportunity Cost?

Opportunity Cost is the money or other benefits lost when pursuing a particular course of action instead of a mutually-exclusive alternative. It represents the value of the best alternative opportunity that is not chosen.

How is Opportunity Cost calculated?

The formula for calculating Opportunity Cost is: Opportunity Cost = Cost of Chosen Alternative - the Cost of the Next Best Alternative.

What is the significance of Opportunity Cost in decision-making?

Opportunity Cost is significant in decision-making as it helps individuals and businesses to consider the value of alternatives forgone when making a choice, thereby promoting more informed and rational decisions.

Who first mentioned the term 'Opportunity Cost'?

The term 'Opportunity Cost' was first mentioned in 1894 by David L. Green in the Quarterly Journal of Economics.

What did Benjamin Franklin famously say about time that relates to Opportunity Cost?

Benjamin Franklin famously stated that 'Time is Money', which is an early concept of Opportunity Cost, implying that the time spent or wasted has an implicit cost.

What are the two types of Opportunity Costs mentioned in the script?

The two types of Opportunity Costs are Explicit and Implicit. Explicit Opportunity Costs have clearly stated costs and benefits, while Implicit Opportunity Costs are not reflected in cash outflows but are implied by resource allocation choices.

How does Costs/Benefits Analysis relate to Opportunity Cost?

Costs/Benefits Analysis is a related model where all costs and benefits of a decision are listed and compared to make a rational choice. It complements Opportunity Cost by considering multiple dimensions of a decision.

What is an example of an explicit Opportunity Cost given in the script?

An explicit Opportunity Cost example is when Bob decides to buy a house for $10,000, he misses out on $500 in interest he would have earned if he had left the money in his bank account.

What is an example of an implicit Opportunity Cost mentioned in the script?

An implicit Opportunity Cost example is the potential income Bob could have earned by renting out his second house instead of using it only for himself.

Why might the formula for calculating Opportunity Cost not be simple?

The formula for calculating Opportunity Cost might not be simple because it can involve non-numerical dimensions such as emotional costs or inconvenience, which are harder to quantify.

How can considering Opportunity Cost help in complex decision-making?

Considering Opportunity Cost in complex decision-making helps by providing a framework to evaluate the trade-offs of choosing one option over another, even when the costs and benefits are multi-dimensional and not easily quantifiable.