IPhone or bulletproof vest? How an opportunity cost helps to make decisions
Due to limited resources and unlimited human desires, we are constantly forced to choose between alternatives. And having made our choice, we sacrifice an unselected opportunity. That is why economists consider all expenses to be alternative.
The opportunity cost is the best of the opportunities lost as a result of the choice made.
The money you spend on a particular purchase is money that you can no longer spend on something else. As in the case of a seven-year-old schoolgirl from Kropyvnytskyi who collected money to acquire an iPhone, but instead spent it on a bulletproof vest for a Ukrainian soldier. An alternative to the cost of a bulletproof vest is an iPhone.
The price of a product helps us as consumers to compare our desire to buy it with the desire to get alternative things that we could buy at the same time.
Alternative value is the invisible side of solutions
The French economist Frederic Bastiat (1801-1850) explained alternative value as a visible and invisible phenomenon. According to his research, the economy should teach us to evaluate things not by what we see, but by what we do not see.
When it comes to choosing to buy certain things, it seems obvious. But even if you do not need to spend money directly on an action, it does not mean that this choice does not cost you anything. After all, for example, the time we spend constantly flipping through the news, starting from February 24, could be used for some other things. No matter how difficult it would be to focus on something else.
This principle can be applied to all decisions in life. For example, you decide to read one book instead of another. Transfer funds to the fund "Come back alive", not save them for peacetime. Learn to be an interior designer, not a software engineer. Become a volunteer instead of returning to work. The main thing here is not to overdo it. Not everyone can join the army at once, as well as not everyone who is not at the front can be a volunteer. After all, if no one will work, and the money is not earned, then it's not spent. There will be no shops, pharmacies, hospitals, schools, cafes or restaurants. And by earning money, you can support the economy with local businesses, and regularly send money to the army.
There is nothing free
We have very often heard about free education, medical care or housing. This wording is misleading, because they are not free. Each of them requires limited resources. In addition, there are alternative ways to use them. The state can only redistribute costs, but is unable to eliminate them. Therefore, if we increase fundings for the army, it means that less will be spent on other needs.
The best available resource application
16-year-old Jacques from France decides whether to smoke or not. On the one hand, smoking will allow him to feel at ease in a group of friends who are smokers. On the other hand, this activity is not only harmful to health, but also not cheap. Suppose that Jacques still succumbed to peer pressure and made his choice in favor of smoking. Suppose a pack of cigarettes costs 8 euros. Having decided to smoke, Jacques spends 2,920 euros a year at the rate of one pack per day. Instead, it would be possible to invest this amount into a pension fund, which is protected from income tax, at 7 per cent per year. If he had done it for 10 years, at the age of 26 he would have 40 344 euros in savings in 29 200. After 10 years, he would have called 119 707 euros for savings of 58 400, at the age of 46 — 275 825 for savings of 87 600.
What is the "cost" of Jacques's choice? As we can see, this is not only 87 600 euros, which are directly spent on the harmful habit, and hidden effects in the form of reducing the expected life expectancy, expensive medical insurance, etc. After all, there is also a lost opportunity to save 275 825 euros, which would be the best available resource application. Does that sound like something, is it true?
So do not neglect the alternative value when making decisions, it is a good ally of prudent choice!
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