What is Opportunity Cost?

Investopedia.com describes Opportunity Cost as “the cost of an alternative that must be forgone in order to pursue a certain action.*” In other words you can only do one thing at a time. When you choose one activity over another you are missing out on something else that you could be doing instead. Just when you thought goofing off was free. The thing that you could be doing instead of what you are doing is your Opportunity Cost. Get it? Yes…no?!

 

Maybe an example can help clear things up.

Life can sometimes pull you one way while your business pulls you another. There are only so many hours in a day so every minute you spend doing a particular task is a minute you can’t use to do another. Oh yea, example. Lets say your business is creating awesome green and yellow dodads. Every dodad you make takes 30 minutes to complete start to finish. If you decide to come home and watch television for 2 hours you are missing out on making 4 dodads. The 4 dodads that you didn’t make is your Opportunity Cost for watching 2 hours of TV. Breaking your business task into units like the example above may help you to put other task into perspective.

  • Dodad Mini = 15 mins
  • Regular Dodad = 30 mins
  • Super Dodad = 45 mins
  • Super Duper Dodad = 90 mins

Aimlessly searching the internet cost you one Super Duper Dodad and a regular Dodad, that cat video you watched 7 times cost you 3 Dodad Minis or one Dodad Mini and a Regular Dodad, and “checking up” on your ex on Facebook cost you one Super Duper Dodad or 2 Super Dodads or 2 Dodad Minis and 2 Regular Dodads. I think you get the point. I was getting a little carried away with the Dodads.

 

Why It’s Important to you.

As an entrepreneur it isn’t always easy to stay focused on what you need to do in order to be successful. Life is all about balance. For me when I start to get distracted I remember how much stuff I could’ve gotten done instead of watching episodes of Star Trek The Next Generation. I’m not saying don’t have fun because having fun is very important. I am just saying keep in mind the opportunity cost of the things you are doing. Remember that your activities aren’t free, it costs you the things you could have been doing instead. If you keep opportunity cost in mind it will help you on your pursuit of success. So next time you are watching that cat video ask yourself, “is it worth it?”

*http://www.investopedia.com/terms/o/opportunitycost.asp

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