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What Are Opportunity Costs?

August 26, 2021 |
Personal Finance

Have you ever heard someone saying that you missed doing or having something because you did or had something else? Well, that is what I am writing about today. An ‘opportunity cost’  is all the things that you lose out on because you made a decision to do something. When someone tells you that you will either go for a vacation in Naivasha or Mombasa, then the opportunity cost is the place that you did not decide to go. In other words, if you chose to go Naivasha, your opportunity cost is Mombasa. If there were more than two options, say Kisii and Eldoret, your opportunity would be all places that you did not choose. Thus, the thing or things you do not choose are your opportunity costs.

I am sure you have been faced with a situation where you only had an option to do one thing when indeed you could have done all. Did you have only Ksh1000 to spend on different things each costing Ksh1000? Here you may want to subscribe to Netflix, buy your favorite pizza, fuel your car, or pay for an event ticket. If you decide to pay for pizza, your opportunity cost is missing out on the event ticket and pizza.

Opportunity costs can be complicated too. What would you make for someone that decides to use their money to go to school. My entire education fees and associated costs run into millions. My parents could have just saved the money for me until I’m 18. At the same time, I would have been working during the years I spent in school and university.

People that did not attend university used their time to work. Some even started young families and you’re there with just your degree and probably no work. But what if the people that did not go to college went? They also missed out on the opportunity to have a degree. Moreover, individuals with a degree have a potential to earn more when they start their careers.

See? You missed something and they missed something. For everything we do, there is an opportunity cost. Let’s get ridiculous, instead of reading my article on opportunity costs, you could be reading on something else like the history of the Central Bank of Kenya, or even getting accustomed to the insurance companies in Kenya. Or something completely different from reading. Most of the times we don’t even think about the things we miss out on when making decisions.

Please, try to consider the costs of not considering other alternatives before you do something. By ignoring the concept of opportunity costs, you may lose out on opportunities that would otherwise come by taking a different route. That is how opportunity costs may be helpful to you.

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