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Understand opportunity costs
Thursday, 20 October 2005
A critical idea to understand for a successful life is that of opportunity costs. It is one of the key concepts of economics, but is very easy to appreciate for anyone.
The idea is that resources are limited - particularly time and money. You only have so much time and money to spend, in other words. Neither is unlimited.
So if you have $20 and you decide to spend it on a haircut - that's $20 that you can't spend on a book. The book is the opportunity cost of the haircut.
Another example is deciding to spend Friday night at a party instead of studying for an exam. The study time is the opportunity cost of the party.
It is the true cost of buying something or spending your resources. It is what you could have had but have given up in order to have something else.
Why is this important?
Everything you do has an opportunity cost. From going for a walk rather than working, to studying literature instead of medicine, to buying a new car instead of saving for your retirement. How you use the scarce resources provided to you - particularly your time - is a huge determinant of how successul you are in life.
How much of what you want you actually achieve is largely a function of how you use your resources. Because of this, you should get into the habit of weighing up the opportunity cost of amost everything you do.
Is what you are using your limited time for really the best thing you could be? Is what you are spending your money on giving you the maximum benefit it could? Is using your time watching television while your relationship with your spouse withers really worth it?
Like everyone else on this planet, your resources are limited. Make sure you're using them to derive maximum benefit for yourself.
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