Week 1 -- Opportunity Cost

Ok. What exactly is opportunity cost?

The notes say it’s the ‘true cost of foregoing the value of the next best alternative,’ I say it’s just the cost of the missed opportunity... the one we've decided to not take. However you want to think about it, in practice, it goes something like this:

Imagine your job search goes well, and you are evaluating two job offers. You can either:

Work at BCG for $150,000
or
Work at JP Morgan Chase for $140,000

If you chose to work at BCG, your opportunity cost would be $140,000, because you’re essentially not taking advantage of JP Morgan Chase’s $140,000 offer.

Learn this using whatever words you want to, but make sure you know what this is. Opportunity cost is part of calculating economic profit, which is just one measure of how good our decision really is. A variation on this concept will come up in a few weeks when we study BATNAs, (or best alternative to a negotiated agreement, taken directly from Fisher and Ury’s Getting to Yes). If you’re having trouble with this idea, take the time to wrap your head around it now. And then keep reading.