O is for … opportunity cost

Opportunity Cost is a key concept in Economics, and is tremendously useful outside that discipline. It is especially pertinent in the sphere of education technology. It is defined as: the next best alternative foregone.

Unlike the more familiar idea of financial cost, opportunity cost can change its value according to both contextual and subjective factors.

For example, if you attend an ICT conference, the keynote talk is unlikely to be scheduled at the same time as any other talk. Therefore the cost of attending it is, let's say, the chance to loaf around in the hotel bar all evening.

Decisions, decisions...Photo by John Hitchcock http://www.flickr.com/photos/arbron/If, however, you have tons of work to do and a very short deadline in which to do it, the cost of attending the talk is going to be higher as far as you are concerned.

Equally, if the keynote is set against another session, the cost of attending the keynote is the knowledge you might have enjoyed by going to the alternative talk. How much of a cost that will be depends on how relevant to you is the alternative talk is.

You already know this, of course. You are reminded of it each time you attend a talk whose content and/or delivery does not live up to its billing.

There are other ways in which opportunity cost might manifest itself. For example, your school might save money by not upgrading the information technology hardware and software it offers to your students and colleagues. An unfortunate consequence of this policy might be that they don't respect and look after the equipment because of their perception of it as old and not up to scratch. In other words, the opportunity cost of saving money on upgrades could be, perhaps paradoxically, an extension of the useful life of the existing equipment.

In case this is confusing, here's how it works:


Opportunity Cost

Spend money upgrading ICT equipment A new grand piano (say)
Do not upgrade ICT equipment Renewed respect for, and care of, the ICT equipment


That second example is an assumption, of course. It is not objectively true. But by applying the concept of opportunity cost you can start to think in terms of 'what if?' in a systematic and logical manner.

Once you start thinking in cost in terms of what any choice deprives you of in terms of what you think you would have gained from making a different choice, rather than in terms of cold hard cash, you will probably start to see many things in a new light.

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