It’s okay to have dreams, but sometimes, when we have an idea in mind, getting that thing in motion isn’t always as smooth as the way we want it to be. To get things started I want to introduce the concept -of opportunity cost, I say this is, is because it’s crucial when comes to decision-making because there are so many more things that need to be factored into consideration, so before you set your mind on doing something, learn the true opportunity cost of that decision.
I’m going to start with a story. It’s a story about a hotel in Hong Kong. It was 13 stories high and belonged to the Hilton Company that ran it and my question is why would it be profitable to knock down a profitable hotel? This hotel was profitable on paper in that money coming in, the revenue was greater than the money going out, the costs. But nonetheless, the owner of the hotel decided to demolish this building. The reason is the owner of the hotel realized that instead of a relatively small building of 13 floors that was a hotel, he could build a huge tall high-rise and rent out the space as office space.
In other words, the owner of the hotel realized that he could make more money by turning this property into a tall high-rise office tower than a relatively small hotel.
This is really one of the core concepts in economics. So, what is Opportunity Cost? The Opportunity Cost is the true economic cost of any decision, so basically, you can think of it as the value of the best-foregone alternative. When we get to a point where we need to make a decision, when we think of the concept of cost, we will always be thinking about the true opportunity cost of that decision. So, in this case, of the Hilton Hotel. On paper, the Hilton Hotel was making a profit. But if we thought about the alternative of having a high-rise in this place and we included the forgone profits of this high-rise as part of the costs, we would realize that actually having the hotel was a non-profitable decision and we would be better off knocking down the hotel, building a high-rise and making even more money.
Now, let’s talk about the opportunity cost of going to Northeastern. So when students come to the University of Northeastern, they have to pay tuition and fees. And the tuition and fees at the school run very close to $50,000 a year, give or take, depending on our own situations. Regardless, that’s not an insignificant amount of money.
However, that is not the true cost, because, in addition to the tuition and fees, we also have to pay with their time. While we are studying, we are giving up some alternative uses of our time. So, we must include tuition and fees, but we also have to estimate the value of time.
Okay, now one way we could estimate the value of the time is by trying to estimate how much they would earn if they were working full-time during this period. So, an estimation of someone who makes 17 dollars an hour, which is the median income of Massachusetts, came to an estimate, that if they were working, they would get wages of approximately $40,000 a year. So, the true economic cost includes both the tuition and fees and the wages, and we get a hefty bill of $90,000 a year. And that is the true opportunity cost of a year’s education.
Now I think the point of talking about the opportunity cost is obvious: You have to plan ahead of time. It’s all about the perspective, how valuable you think this project is, investing money, and more importantly, the time to do something, if it’s worth it for you after careful calculation, we would encourage you to go for it. And maybe the cost of investment and return isn’t necessarily positively correlated, but it has very high future uprises, it’s all relative to your expected value of a project.