[Market Economy Guide] Opportunity Cost

Because of the “scarcity of resources,” we have to make choices…

Every choice necessarily comes with an “opportunity cost”

An old, hungry lion wandered the field all day in search of prey. But unable to catch any suitable game, he had no choice but to return still hungry. As the exhausted old lion slowly shuffled toward the shade of a tree, what should he find? A rabbit happened to be fast asleep beneath it.

The Lion’s Choice

The old lion was overjoyed to discover the sleeping rabbit. Quietly celebrating to himself, he crept forward so as not to miss the prey that could satisfy his hunger. But at that very moment, he spotted another target. Very near the rabbit, a deer was calmly grazing on the grass. At the sight of the deer, the lion fell into deep thought. Should he go after the prey that would fill his stomach more, or should he target the sleeping rabbit, which he could catch easily with little effort?

After much deliberation, the old lion decided to catch the deer first and then the rabbit afterward. It seemed a shame to let the large deer go, and he was confident he could catch the rabbit after catching the deer. The moment he made up his mind, the old lion charged straight at the deer. But at his age, he was too slow to catch the swift animal. To make matters worse, the sound of the lion and deer chasing each other woke the rabbit with a start. The rabbit looked around in alarm and then dashed away. In the end, having lost both the deer and the rabbit, the old lion could do nothing but beat the ground in regret.

“Ah, I should have just hunted the rabbit instead of getting greedy! Because of my greed, I lost both the deer and the rabbit!”

Choice and Cost

The story of the old lion teaches us the importance of choice and opportunity cost. As we know, life is a continuous series of big and small decisions. No matter what we do, moments of choice inevitably arrive, and each time we think carefully in order to make the best possible decision. Why? Because choosing one thing means giving up another, or perhaps several others. And every choice comes with an opportunity cost. Opportunity cost refers to the benefit lost by choosing one thing and giving up another.

That is why, when choosing one option, we must carefully weigh the gains and losses that come with not choosing another. If we make the wrong choice, we may end up facing a situation in which we pay a greater cost than the benefit we had expected.

For example, imagine someone trying to invest in financial assets. He is torn between investing in stocks, which carry greater risk but may generate higher returns, and putting his money into a stable deposit product. Deposits are safe, but it is hard to expect returns beyond a fixed amount. They also take a long time. Stock investing, by contrast, can yield quite high returns, but if things go wrong, there is also the risk of losing principal. Even if he decides to invest in stocks, he must still choose which company’s shares to buy. There is no avoiding the need to think about opportunity cost.

The same is true of concerns over career paths and education. In today’s era of low growth, the employment crisis, which has become a social problem, forces young people to think about opportunity cost. Especially these days, when even college graduates find it difficult to get the jobs they want, high school seniors are thinking more seriously than ever. Should they go on to college after graduation, or jump straight into the job market? Suppose that if Student A enters the workforce immediately after graduation, he can earn 20 million won a year, while going to college would cost him 10 million won a year. If Student A chooses to go to college, the opportunity cost incurred in one year is 30 million won. This is because the income he could have earned by working must be added to the cost of attending college. One should carefully consider which path to choose, but once a choice is made, one must willingly bear responsibility for the outcome.

Resource Scarcity and Opportunity Cost

If, after much thought, a young person who chose to go to college then drops out and starts a business, how would people around him react? Some would advise him to graduate first and then find a stable job. Others would encourage him to channel his youthful passion and drive into making his business a success.

In reality, wouldn’t most people advise him to graduate college safely, or choose that path themselves? Since the future is unknown, people often make defensive choices aimed at reducing failure and minimizing opportunity cost.

But what if that young person whom others tried to dissuade from dropping out were someone like Bill Gates, the founder of Microsoft; Steve Jobs, who founded Apple and shaped the trends of his era with the iPhone; or Mark Zuckerberg, who founded Facebook? These men gave up the chance to have stable jobs in order to pursue their goals through business. They went on to amass astronomical wealth as founders of some of the world’s leading information technology (IT) companies. Of course, if they had failed in business, they would have had to bear enormous opportunity costs.

In this way, an unknowable future and the scarcity of limited resources place us at the crossroads of choice. They constantly force us to think about what opportunity costs our decisions will create, and whether we are willing to accept those opportunity costs in making them. In the end, the saying “every choice has a price” is little different from saying “every choice comes with an opportunity cost.”

■ Remember this

Every choice comes with an opportunity cost. Opportunity cost refers to the benefit lost by choosing one thing and giving up another. That is why, when choosing one option, we must carefully weigh the gains and losses involved in not choosing another. If we make the wrong choice, we may end up in a situation where we have to pay a greater cost than the benefit we expected.

Sung-no Choi, President of the Center for Free Enterprise (CFE)

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Original title: [시장경제 길라잡이] 기회비용

Author: Sung-no Choi

Date: 2020-09-07

Source: https://www.cfe.org/bbs/bbsDetail.php?cid=column&pn=6&idx=23052