Opportunity Costs

Opportunity Costs Of No Decision

Have you ever considered the opportunity costs of not making a decision?

The phrase “no such thing as a free lunch” was in use by the 1930s, but its first appearance is unknown. The “free lunch” in the saying refers to the formerly common practice in American bars of offering a “free lunch” in order to entice drinking customers.

The “free lunch” refers to the once-common tradition of saloons in the United States providing a “free” lunch to patrons who had purchased at least one drink. Many foods on offer were high in salt (e.g., ham, cheese, and salted crackers), so those who ate them ended up buying a lot of beer. Rudyard Kipling, writing in 1891, noted how he came upon a bar-room full of bad Salon pictures, in which men with hats on the backs of their heads.

The phrase and the acronym are central to Robert Heinlein’s 1966 science-fiction novel The Moon Is a Harsh Mistress, which helped popularize it.

The free-market economist Milton Friedman also increased its exposure and use by paraphrasing it as the title of a 1975 book, and it is used in economics literature to describe opportunity cost. Campbell McConnell writes that the idea is “at the core of economics”. He wrote;

“A major source of objection to a free economy is precisely that group thinks they ought to want. Underlying most arguments against the free market is a lack of belief in freedom itself.

Milton Friedman was an American economist who received the 1976 Nobel Memorial Prize in Economic Sciences for his research on consumption analysis, monetary history, and theory and the complexity of stabilization policy.

In 1940, Friedman accepted a position at the University of Wisconsin–Madison but left because of differences with faculty regarding United States involvement in World War II. Friedman believed the United States should enter the war. In 1943, Friedman joined the Division of War Research at Columbia University (headed by W. Allen Wallis and Harold Hotelling), where he spent the rest of World War II working as a mathematical statistician, focusing on problems of weapons design, military tactics, and metallurgical experiments.

In 1945, Friedman submitted Incomes from Independent Professional Practice (co-authored with Kuznets and completed during 1940) to Columbia as his doctoral dissertation. The university awarded him a Ph.D. in 1946. Friedman spent the 1945–1946 academic year teaching at the University of Minnesota (where his friend George Stigler was employed). On February 12, 1945, his son, David D. Friedman was born.

University of Chicago

In 1946, Friedman accepted an offer to teach economic theory at the University of Chicago (a position opened by the departure of his former professor Jacob Viner to Princeton University). Friedman would work for the University of Chicago for the next 30 years. There he contributed to the establishment of an intellectual community that produced a number of Nobel Prize winners, known collectively as the Chicago school of economics.

With George Stigler and others, Friedman was among the intellectual leaders of the Chicago school of economics, a neoclassical school of economic thought associated with the work of the faculty at the University of Chicago that rejected Keynesianism in favor of monetarism until the mid-1970s, when it turned to new classical macroeconomics heavily based on the concept of rational expectations.

In 1963 Friedman published the first of three books he would coauthor with Anna J. Schwartz, A Monetary History of the United States, 1867–1960. Combining theoretical and empirical analysis with institutional insights, that volume provided an intricately detailed account of the role of money in the U.S. economy since the Civil War. Especially influential was the authors’ claim that the Great Depression would have been a typical downturn had it not been for policy errors made by the Federal Reserve.

Several students and young professors who were recruited or mentored by Friedman at Chicago went on to become leading economists, including Gary Becker, Robert Fogel, Thomas Sowell and Robert Lucas Jr.

The notion of opportunity cost comes from the economic principle of scarcity. We live in a world of finite time and resources.

  • Our most scarce resource is our time.
  • No matter how much income or wealth you possess, you still only have twenty-four hours per day.
  • None of us know how many days we have on this earth.

Given the reality of scarcity, every choice we make involves the forgoing of another action or opportunity. Nobel Laureate James Buchanan describes opportunity cost this way in his treatise, Cost and Choice:

Cost does reflect pain or sacrifice; this is the elemental meaning of the word… Any opportunity within the range of possibility that must be foregone in order to select a preferred but mutually excluding alternative reflects “costs” when it is “sacrificed.”

When we look at the cost of not making a business decision, we can look at the choice not taking the alternative decision. These are called opportunity cost examples.

We face trade-offs every day. Everything in life has an Opportunity Cost. .

Let me show you an opportunity cost example. If you decide to go and get a degree and pay $70,000 for the privilege, then there is an opportunity cost of not learning other things for 3 years while you finish your degree.

Everything in life has Opportunity Cost Examples.

Opportunity Costs
Opportunity Costs

In a way, we need to train our brains to look at life in terms of opportunity costs.

In a reality, even decisions that appear to be a no brainer carry hidden costs of the options not chosen.

If we learn to evaluate business choices via the lens of Opportunity Cost Examples, the stakes become clearer.

Opportunity Costs – 3 steps to evaluating business decisions.

When working at home or in an office, the decision would be considering if is it worth me paying for more web domains to operate or channel the money into hiring a writer for the ones you already have. These decisions need to made for the efficient running of my business. Where is my time best spent?

There are several trade-offs to consider growth. Is it worth taking out a loan for the company to grow? Or is that too much of a risk to the equity used to fund the business.

Businesses have to weigh the pros and cons of the two options between debt and equity to determine the ideal capital structure for their company.

Non-financial resources include things like business ethics, social responsibilities, getting feedback on content, consistency, reliability. These are all things that add value to our business and can be measured with statistics but do not have a price tag.

The opportunity costs of not getting back to a customer in a certain time frame could the cost of losing the sale.

We can apply the same decision-making idea to answer the question of where do you see your self in say 5 years time. What are you plan? What is the opportunity costs of doing training or starting a new web page.

For me the best decisions are made when looking at not taking the alternative.……..

Have a great day……..and all the best with business. Further reading can new found here. Legitimate Work From Home

Kind Regards

Jen

Opportunity Costs
Opportunity Costs in every decision
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