Opportunity costs involve the resources given up to take advantage of an opportunity. Low opportunity costs involve giving up little resources, while high opportunity costs involve giving up more. Evaluating opportunity costs is important in all kinds of decisions.
Opportunity costs in general have to do with the amount of costs involved in making some economic decision. Opportunity costs can be quite high, indicating that a significant amount of resources must be forgone or given up to take advantage of a given opportunity. With low opportunity costs, the individual has to give up or give up very little resources to take advantage of an opportunity. It is important to note that measuring low or high opportunity costs requires careful scrutiny of the situation of the individual involved and the type of chances or resources that must be given up in order to move forward with a specific opportunity.
One of the easiest ways to understand what constitutes low opportunity cost is to consider an individual who has the opportunity to work as a stockbroker in a supermarket. If that individual is not trained in some sort of skilled job and currently has no other job prospects, the choice to claim this opportunity will not require giving up other job opportunities that would be more lucrative. This would constitute a low opportunity cost, indicating that the individual can enjoy the benefits of the new job without losing much.
At the same time, if the individual being offered the equity position in the supermarket has a college degree and is actively seeking a position relevant to that degree, there is still a lot to lose. This is especially true if the supermarket work schedule precludes the ability to aggressively pursue positions that would pay more and be suited to the individual’s abilities. Here, the opportunity cost is high, since the individual has to pass up potential opportunities to secure a job that would pay more and ultimately lead to a career.
Low opportunity costs can be related to any type of financial decision. Investors can weigh the pros and cons of investing in one stock versus another based on what must be given up in order to earn the desired returns from the selected asset. If there is a large risk in the selected stock, this means that the investor is probably incurring high opportunity costs, since he could have made substantial money by investing in assets with lower volatility. At the same time, an investor who engages in more conservative investments is likely to assume low opportunity cost, since the effort involves less risk, and is likely to produce fairly constant returns as long as those assets are held.
Evaluating opportunity cost can have an impact on all kinds of decisions. Deciding to attend college instead of entering the workforce directly means giving up your income now in anticipation of being able to make more money after you graduate. Even something as simple as deciding which vegetables to grow in a garden will involve weighing the benefits and responsibilities of choosing one vegetable over another, especially in terms of what is expected as an outcome of the venture. Because so many variables can influence decisions, it is usually necessary for the individual to determine whether a particular decision has a low or high opportunity cost.
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