Opportunity Cost Calculation

Opportunity Cost: The True Cost of Your Choices

Every decision has a hidden cost. Don’t ignore it!

1. What is it?

• The value of the next best thing you gave up when you made a choice.
• It’s the benefit you could have received from your best alternative.

2. Why does it matter?

• Forces you to think beyond just the money you spent.
• Helps you make smarter, more rational decisions with limited resources.
• Ensures you’re always choosing the most valuable option.

3. How to Calculate (Simplified):

Example: You have £100,000.

• Option A (Chosen): Invest in a new product. Expected profit: £15,000.
• Option B (Best Forgone): Invest in a market campaign. Expected profit: £10,000.
• Option C: Invest in new office furniture. Expected profit: £2,000.

Your Opportunity Cost of choosing Option A is the £10,000 profit you gave up from Option B.

4. Where to Look for It:

• Investment Decisions: Choosing Project A means giving up Project B’s potential return.
• Resource Allocation: Assigning your best engineer to Project X means they can’t work on Project Y.
• Time Management: Spending an hour on email means you’re not spending it on strategic planning.

Golden Rule: Always ask yourself: “What is the best thing I’m not doing by making this choice?” That’s your true cost.