I am busy studying for exams at business school. Today, I was reading about opportunity costs. The basic idea is that resources (including time) are scarce, and that whenever you make a decision to pursue one option, you are incurring a cost. Essentially, the opportunity cost of an activity is what we give up when we make a choice. Let’s say that you own a manufacturing plant which can produce both personal computers and printers. The plant has a relatively fixed capacity, so if you make more computers, you will make less printers.
Another fairly standard example has to do with the costs of a university education. Here is the description from Investopedia.com: “The opportunity cost of going to college is the money you would have earned if you worked instead. On the one hand, you lose four years of salary while getting your degree; on the other hand, you hope to earn more during your career, thanks to your education, to offset the lost wages.”
So far, so good. Of course, you can take the knitter and put her in business school, but you can’t stop her thinking about knitting. What is this knitter thinking when she reads about opportunity costs? Let’s say that I can knit 10 sweaters a year. The opportunity cost of each sweater that I knit for Emma, Leah or Doug will be one less sweater that I can knit for myself:
Perhaps this is not a coherent enough example of opportunity costs for the ardent knitter. After all, whether one is knitting for oneself or for others, one is still engaged in knitting.
Let us take a more cogent example. Let us say that after accounting for necessities (like sleeping, working, eating, cleaning, cooking, showering, commuting, etc) you have 40 hours a week to devote to other activities. Note that I am being very generous with this number because (1) my children are grown up and have flown the coop, and (2) I devote as little time as possible to housework. Now, let us suppose that someone (who shall remain nameless) who finds herself in this new empty-nester position foolishly elects to go to business school and must now fill her free time with studying. Well, then, the opportunity cost of business school is less time to knit.
Isn’t it obvious? Lesson over, back to work. Alas!